The Goods and Service Tax (GST) Council members in their virtual meeting on Thursday will discuss the crucial single point agenda of compensation to states. The members will discuss ways to address the issue of revenue shortfall, including borrowing from market, as COVID-19 pandemic affects the entire Indian economy.
The government had sought views on borrowing from the market from Attorney General KK Venugopal in March, to which he said the Centre had no such statutory obligation. So, the ball could be in states' court to decide if they want to borrow from markets or not.
However, the AG has advised the Centre that it must compensate states fully for the loss of GST revenue during the coronavirus lockdown. Experts also believe the Centre has another option to rationalise rates or to bring more items in the compensation cess but that'll require state members' approval.
States have not been compensated since May. The issue of GST compensation has become a bone of contention between the Centre and states, with the government clearly telling the parliamentary standing committee on finance that it's in no position to pay for the GST dues to states as per the current revenue sharing formula as the COVID-19 has severely affected businesses.
Since FY16, states are entitled to get 14 per cent hike in revenue for the next five years till 2022, though COVID-19 has badly hit the Centre's coffers. The Centre has been of the view that states can be compensated for the revenue shortfall from compensation cess only.
Bihar, Punjab and Rajasthan are likely to demand compensation from the GST Council in the meeting. Many states are even planning to take action against the GST Council for not paying compensation on time.
Even state BJP leaders are of the view that states should be compensated. "The Centre should borrow and pay GST compensation to states even if it is not legally bound to do so. The centre is morally bound to do so," Bihar Deputy Chief Minister and Finance Minister Sushil Kumar Modi in a statement said.
Punjab's Finance Minister Manpreet Singh Badal called the central government's attempt to deny the states their rightful compensation tantamount to "sovereign default".
Under the current GST structure, taxes are levied under four slabs -- 5, 12, 18 and 28 per cent. The government also charges a cess on luxury, sin and demerit goods on items under the 28 per cent tax slab. The funds collected via this cess are shared with states to meet the revenue shortfall.
But the revenue from cess has been declining since August 2019, though the Centre had fully paid the GST compensation dues to states for FY20. In total, Rs 1.65 lakh crore was released to states in different tranches in FY20, even though the total cess collected in the fiscal year stood at Rs 95,444 crore.