Recently, the 41stGoods and Services Tax (GST) council meeting was held to discuss the issue of compensating states on account of revenue loss due to implementation of GST and fall in cess collections.
The Centre on Thursday asked the states to borrow money from the market in order to meet the ₹ 2.35 lakh crore compensation shortfall under the Goods and Services Tax (GST) in the current financial year. In the 41st meeting of the GST Council, chaired by Finance Minister Nirmala Sitharaman, the Centre provided the states with two options to carry out the borrowing process.
Following the meeting, Revenue Secretary Ajay Bhushan Pandey said that out of the total shortfall of ₹ 2.35 lakh crore, ₹ 97,000 is on account of of GST and the remaining is due to outbreak of the COVID-19 pandemic.
The two options given to the states by the Centre are as follows:
- To borrow up to ₹ 97,000 crore, which is the shortfall in the GST revenue compensation
- To borrow the entire ₹ 2.35 lakh crore, which is the total shortfall, including the impact of COVID-19
The Centre further specified that the burden of the borrowing will not fall upon the states as it would be borne by extension of the cess imposed on sin and luxury goods. Moreover, the borrowings will be facilitated through a special window under the consultation of the Reserve Bank of India (RBI).
The Centre would give details of the two options to the states in a couple of days, following which the states will pick their options. “States have been given seven days’ time to think over the proposal,” the finance secretary said.
The economic slowdown had reduced both GST and cess collections in FY 2019-20, resulting in a 40% gap (shortfall) between the compensation paid and cess collected.
The central government paid over Rs.1.65 lakh crore in 2019-20 as GST compensation by utilising the excess cess amount collected during 2017-18 and 2018-19.The state’s GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore.
The GST Compensation Act, 2017 guaranteed states that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
- Sin goods are goods which are considered harmful to society and individuals.
- Example of sin goods: Alcohol and Tobacco, Candies, Drugs, Soft drinks, Fast foods, etc.
Briefing on the two options, Ms Sitharaman said, “If a state goes for option 1, it will borrow less, but its compensation entitlement will be protected. So choice is between borrowing less and getting cess later or borrow more and pay for it using cess collected during transition period.
In 2017, when the new tax regime was introduced, the states were mandated to increase their share of revenues by 14 per cent per year, while the Centre promised to compensate states for five years if they failed to achieve that target. According to news agency Reuters, states’ revenues fell more than 40% year-on-year in the three months to June due to economic fallout from a coronavirus lockdown.
