GST Compensation Decision Deferred; Rs 20,000 Cr To Be Released To States Immediately

At the 42nd Goods and Services Tax (GST) Council meeting chaired by Finance Minister Nirmala Sitharaman on Monday, it was decided to defer the decision on compensation to states for their loss of revenue. The council will meet again on 12 October.

Sitharaman said that compensation cess amounting to Rs 20,000 crore collected so far this year will be released to all states tonight (5 October).

Further, Rs 25,000 crore of IGST (integrated goods and service tax) of 2017-18 will be released by the end of next week to states that received less earlier, she added.

In a statement from the Finance Ministry on recommendations of the GST Council post the meeting, it said that levy of Compensation Cess is proposed to be extended beyond the transition period of five years i.e. beyond June 2022, for such period as may be required to meet the revenue gap. Further details on this are yet to be worked out.

"Ten states demanded that full compensation should be paid to the states during the current year as per clauses in the law and centre should borrow," said Thomas Isaac, Kerala's finance minister after the briefing, as quoted by media reports.

The GST Council meeting that began at 11 am in the presence of Finance Ministers of States and Union Territories (UT), is crucial amid the debate on the Centre's proposals to meet the GST compensation shortfall.

After the BJP-led NDA government proposed special borrowing window of Rs 97,000 crore for states to borrow, ten opposition-led states have been demanding that the Centre should borrow and provide to the states rather than the states borrowing, since it was the statutory obligation of the central government to provide for losses made by the states.

"The outcome of the GST Council meeting today will be a test for the central government's adherence to law and to its promises," said former finance minister P Chidambaram in a tweet.

In the last meeting on 27 August, the GST Council presented two options to states regarding GST compensation including a special window in consultation with the Reserve Bank of India (RBI) to provide Rs 97,000 crores at a reasonable interest rate or that the entire GST compensation gap of Rs 2,35,000 crores this year can be met by them from the market in consultation with RBI.

The Centre has estimated a Rs 2.35 lakh crore shortfall in cess collections used to recompense States, while compensation payments of Rs 3 lakh crore are due this year. The central government argued that only Rs 97,000 crore of this shortfall can be attributed to GST implementation, while the rest is due to the unprecedented economic stress arising from the pandemic.

Bihar's Deputy Chief Minister (also Finance Minister for the state), Sushil Modi, had asked the central government to initiate arrangements for setting up a special window for states stating that financial resources were required to get back on the economic recovery track and the government should not lose time in finding alternatives.

On the other hand, Kerala had said that it would reject both the proposals.