The 41st GST Council meeting chaired by Finance Minister Nirmala Sitharaman was held through video conference on August 27, 2020. The meeting saw in attendance Minister of State for Finance Anurag Thakur and Finance Ministers of States and Union Territories and senior officers from the union government and states.
The GST Council discussed several issues including GST rates revision, revenue shortfall and compensation to states. As mentioned during the GST Council meeting in March, legal views on the current situation were sought from the Attorney General of India.
GST collection severely impacted due to COVID-19: Finance Secretary
Following the 41st meeting of the GST Council, Finance Secretary Ajay Bhushan Pandey said that the collection of Goods and Services Tax has been severely impacted this year due to the coronavirus pandemic. He revealed that the centre had released over Rs 1.65 lakh crore as GST compensation to states for financial year 2019-20, which included Rs 13,806 crore for the month of March.
GST collection has been severely impacted this year, due to #COVID19 pandemic. As per GST Compensation Law, states need to be given compensation: Finance Secretary on 41st meeting of GST Council pic.twitter.com/DlVeLuhh8l
— ANI (@ANI) August 27, 2020
GST compensation to be paid for transition period
The Finance Secretary further stated that as per the Attorney General, GST Compensation has to be paid for a transition period - from July 2017 to June 2022. He also stated that the revenue has to be protected and the compensation gap should be met from cess fund, which in turn has to be funded from the levy of cess.
Pandey stated that the Attorney General's clear opinion was that the compensation gap cannot be met from the Consolidated Fund of India. He suggested that the compensation cess levy can be extended beyond 5 years, to meet the revenue shortfall.
Compensation gap rises in 2020: FM
According to the Finance Minister, the compensation gap has risen this year due to the COVID-19 pandemic. The shortfall due to the implementation of GST is estimated to be Rs 97,000 crore.
GST Compensation Options
Following two options were presented by GST Council for compensation to states:
1. To provide a special window to states, in consultation with the Reserve Bank of India to provide Rs 97,000 crore at a reasonable rate of interest. This money can then be repaid after 5 years from the collection of cess.
a) Centre will facilitate states through RBI in getting loans for portion arising out of GST implementation.
b) The compensation gap arising due to the extraordinary situation and Act of God in the form of COVID-19. Under this, the centre will give further relaxation of 0.5% in states' borrowing limit under the FRBM Act. Hence, the states can choose to borrow more, beyond the expected compensation itself, since the injury has been caused by Coronavirus.
2. The entire GST compensation gap of Rs 2,35,000 crore of this year can be met by the states, in consultation with the RBI.
Option 2 presented to GST Council was that the entire GST compensation gap of ₹ 2,35,000 crore of this year can be met by states, in consultation with RBI. These options will be sent to states for a view within 7 Days & will apply for this fiscal year only: Finance Secretary https://t.co/kOPySaiOko
— ANI (@ANI) August 27, 2020
GST Council Meeting: Key Highlights
• The Finance Minister stated that the two options were placed before the states. The council has assured the states support in talking with the RBI and getting G-security linked interest rates so that each state does not have to struggle for loans.
• The states, in turn, have requested a 7-day window to think over and get back to the Finance Ministry regarding the two options. The two options will only be available during the current year. The situation would be reviewed next year in April 2021 and accordingly, a decision will be taken.
• FM Sitharaman stated that once the arrangement is agreed upon by the GST Council, it will work fast to clear these dues and also take care of the rest of the financial year
• During April- July 2020, the total GST compensation to be paid amounts to Rs 1.5 lakh crore, as there was hardly any GST collection in April and May.
• The annual GST compensation requirement is estimated to be around Rs 3 lakh crore, and cess collection is expected to be around Rs 65,000 crore, leading to an annual compensation gap of Rs 2.35 lakh crore, as per Revenue Secretary.
Significance |
| According to the Finance Ministry, if a state goes for Option 1, it will borrow less but its compensation entitlement will be protected. The states essentially have two choices: |
Background
The Union Finance Minister Nirmala Sitharaman had held a virtual media briefing after the 41st GST council meeting on August 27, 2020. The Finance Minister briefed the media regarding the outcomes of the GST Council meeting and key resolution options.
The Centre had in March 2020 sought Attorney General K K Venugopal's inputs on the legal aspects of market borrowing by the GST Council to make up for any shortfall in the compensation fund.
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