As announced earlier, the 42nd GST Council meeting was held on 5th October 2020, the GST Council met to make the final decision on the compensation cess issues to various states under the GST.

The Council also observed the decision to encompass the surcharge on taxes over luxury goods such as cars, and tobacco products beyond the timeline decided till June 22, 2022. But, still failed to find an amicable consensus on the ways to compensate tax revenues for the losses suffered by the States.

Therefore, here are the key highlights of the main decisions made at the meetings- 

1. There is still a lack of consensus among the member States regarding the method of compensation to the States. It was observed that the Council was divided in opinions with some conflicting with the Centre’s offer of borrowing to meet the shortfall in receipts.

2. Regarding the compensation cess for the year, it was announced by the Chairman of the Council meeting to disburse the amount on the same day out of the collections made in a total of this year i.e. Rs.20000 crores.

It was acknowledged that when the Goods & Service Tax was introduced in July 2017, the Union Government made a promise to compensate the States at an incremental revenue of 14 per cent over their last tax receipts in the first five years of GST rollouts, through charging a cess or surcharge on the luxury as well as sin goods, still, the GST collections on this count have short fallen due to the slowdown in the economy.

To resolve the current situation, the Union Government has recommended the states to borrow against future compensation receipts, which was agreed by the GST Council for a further period of five years levy.

Surcharge applicable on cars and other luxury goods and tobacco products ranges from 12% to 200% on the top of the highest GST rate of 28 per cent which was due to expire in June 2022, is part of the national GST introduced in 2017.

Sitharaman said that some states wanted the Centre to calculate the GST shortfall amount at Rs.1.10 lakh crore, instead of 97000 crores, which was approved by the Centre before the 42nd GST meeting Council.

The Union Government provided two options to the Member States to either borrow Rs.97000/-crores from a special window simplified by the RBI or Rs.2.35 lakh crore from the market and further proposed to extend the compensation cess levied on Luxury, Demerit &Sin goods outside 2022 to reimburse the borrowing.

The Union Finance Minister while explaining the repayment scheme to the Council she said that interest on the borrowed amount would carry a  first charge on the cess to be collected beyond the five years.

The next charge would be 50 per cent towards the principal amount, which gets borrowed that 1.10 lakh crore, and then the remaining 50 per cent would be towards COVID affected compensation.

Following are some other decisions taken by the GST Council-

a. Relief to small taxpayers-

GST Council’s decision to make returns for small taxpayers every quarter rather than a monthly basis has been provided as a major relief to the small businessmen under the provisions of the Act. This means that the number of returns will be significantly reduced from 24 monthly returns to 8 returns to be effective from Jan 1, 2021.

b. GST council on filing monthly returns-

Similarly, from Jan 1, 2021, taxpayers having an annual turnover lesser than Rs 5 crore would also not be required to submit file monthly returns (GSTR-3B and GSTR-1) and only quarterly returns.

c. Karnataka appellate authority rules 18% GST on whole wheat ‘Parota’ is “void”- 

The Karnataka appellate authority comprising of Judicial Member, D P Nagendra Kumar, and Accountant Member, M S Srikar provided that such ruling provided by the AAR wherein 18 per cent GST applicable on whole wheat parotta and Malabar parotta is void ab initio because it was vitiated by the process of suppression of material facts.

Conclusion:

After a day-long GST Council meeting held on the 5th of October 2020, the Centre and the states could not draw consensus on the issue of borrowing to make up for the compensation shortfall. Therefore, the GST Council will meet on October 12 to further deliberate on compensating states for GST cess shortfall.

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