The global pandemic of COVID-19 has brought grave losses to humanity as well as the tax collections this year as per the Government reports. It’s a known fact already that at the time of the introduction of Goods and Services Tax 2017, the Union Government had promised a certain amount of their revenues as GST compensation to the states till the year 2022 to compensate the states as a result of the elimination 17 states and union level taxes in India.

Further, the Central Goods and Services Tax Act prescribes the compensation to be calculated assuming a 14% annual growth in GST collections by states over the base year of 2015-16, coronavirus outbreak, the compensation cess collection has plunged in the last few months. Now, the GST collections have reached the lowest point, making it tough for the Union Government to fulfill its promise.

Not only this, but the statement was also given by the Attorney General of India that “the Union Government is not obligated to pay compensation when it has not received lesser revenue” has eased up the stress level of the states. With a purpose to resolve this issue, the GST council held its 41st meeting as it had notified earlier and the agenda of the meeting was mainly discussing compensation for the states.

Highlights of the GST Council meeting-

1. Alternatives to the issue between the states

The Centre on Thursday offered two options to compensate them amid inadequate cess collections under the Goods and services tax regime. The first option involved the offer of a special window to states, in consultation with the RBI to the tune of Rs.95000 crores at a reasonable rate. The other was for the states to borrow Rs.2.35 trillion from the market with RBI as a facilitator.

However, the burden of such repayment shall be on the Union Government and not on the state Government. It has also been notified that the center will facilitate the borrowing, by talking to the RBI. This is to ensure individual states do not rush to the market and raise bond yields.

2. Act of God may result in Economic contraction this Fiscal Year

Finance Minister Nirmala Sitharaman said that once it is agreed upon by the GST Council the Government can proceed fast and clear the dues and also take care of the rest of the fiscal year. If a state goes for Alternative 1, it shall be required to do lesser borrowing, but its right for compensation shall stay the same. Alternatives shall have to be provided between-

i) Lesser borrowing and claiming for cess later or;

ii) Borrow more & pay for it by expending it during the transition period.

3. Compensation Gap has widened due to the Global Pandemic-

According to government estimates, there has been a huge gap in the compensation collection as nearly as Rs 97000 crores, along with Rs. 2.35 trillion the overall deficit factoring in the COVID-19 situation. The center had released1.65 lakh crore compensation to the states for the financial year 2019-20 which included 13.806 crores for March. An estimate could be taken from the fact that the revenue collections have been 33% lesser than last year at Rs.21940 crore.

4. GST Collection Severely impacted this year due to COVID-19-

Union Finance Minister Mrs. Nirmala Sitharaman also maintained that the GST revenue losses in the current fiscal year are not due to its implementation and in the global pandemic shall be considered an exception.

5. Statements Given By Attorney General of India-

i. The Attorney General’s clear opinion was that the compensation gap cannot be met from the Consolidated Fund of India. He recommended that the period of compensation could be prolonged for a further 5 years to fulfill the shortfall created due to the situated.

ii. Attorney-General said that GST Compensation has to be paid for a transition period – from July 2017 to June 2022 and has to be protected.

iii. Centre had in March sought views from the Attorney General on the legality of market borrowing to make good the shortfall in the compensation fund.

iv. The Centre will provide details to states in a couple of days and they will return to the proposed council meeting with their choice. The borrowing mechanism will be there for FY 21 after which it will be reviewed in April 2021.

v. The timeline for the cess imposed on the sin and luxury goods will be extended beyond June 30, 2022, up to which the states are constitutionally guaranteed compensation to help service the debt.

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