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GST Council meet: How to compensate states for revenue loss?

Opposition-ruled states are expected to come up with a third alternative option but NDA-ruled states may ask Centre to fast-track borrowing process to tide over financial losses incurred due to COVID-19

twitter-logoBusinessToday.In | October 5, 2020 | Updated 11:23 IST
GST Council meet: How to compensate states for revenue loss?
GST meeting today: The states are staring at a staggering Rs 2.35 lakh crore GST revenue shortfall in the current fiscal

The Goods and Services Tax (GST) Council's 42nd meeting will take place on Monday. The meeting is expected to be a stormy affair as the opposition-ruled states plan to counter both offers presented by the Centre. To bring in consensus among states, the government has reportedly brought some changes in its 'borrowing plan', promising to enhance the borrowing limit from Rs 97,000 crore to Rs 1 lakh crore. The Centre has also agreed to lower the GST forecast from 10 per cent to 7 per cent proposed earlier.

Despite these changes, the opposition states are expected to oppose both the borrowing options put forth by the Centre to meet the GST compensation shortfall due to COVID-19.

These states are expected to come up with a third alternative option, which will be based on two "non-negotiable" principles, reported Business Standard. But, the NDA ruled states may ask the Centre to fasttrack the borrowing process to tide over the financial losses incurred by them due to COVID-19.

Considering a huge revenue shortfall being faced by states, the government has also assured to extend the deadline to pay compensation cess beyond June 2022. The compensation cess is levied on luxury, demerit and sin goods.

In the current fiscal, the states are staring at a staggering Rs 2.35 lakh crore GST revenue shortfall. Of this, about Rs 97,000 crore is on account of GST implementation and rest Rs 1.38 lakh crore is the impact of COVID-19 on states' revenues.

Also read: 'Committed to compensate entire GST shortfall to states': FinMin sources

The Centre in August gave two options to the states -- either borrow Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from market.

The non-BJP ruled states are at loggerheads with the Centre over the issue of funding the shortfall. Chief Ministers of six non-BJP ruled states - West Bengal, Kerala, Delhi, Telangana, Chhattisgarh and Tamil Nadu - had written to the Centre opposing the options, which require states to borrow to meet shortfall.

While these states want the Centre to borrow to meet the shortfall, the Centre has argued that the revenue accruing from GST compensation cess goes to the states and the Centre cannot borrow on the security of the tax it does not own.

Attorney General of India K K Venugopal had also given his legal view on the compensation cess issue where he has opined that there is no obligation on the Centre under the GST laws to compensate for the loss of revenue.

The payment of GST compensation to states became an issue after revenues from the imposition of cess started dwindling since August 2019. The Centre had to dive into the excess cess amount collected during 2017-18 and 2018-19.

The Centre had released over Rs 1.65 lakh crore in 2019-20 as GST compensation. However, the amount of cess collected during 2019-20 was Rs 95,444 crore. The compensation payout amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18. During April-July of the current fiscal, the total compensation due to states stand at over Rs 1.51 lakh crore.   

Also read: GST Council set for stormy meet on Monday as non-BJP states oppose borrowing option

With PTI inputs

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