GST Council Meet: Sitaraman assured that no one will be denied compensation for revenue losses arising out of the Covid-19 pandemic. Next meeting to be held on 12th October.

Finance Minister, Nirmala Sitaraman at the GST Council meet on 5th October said on the Compensation Cess dispute that, “From among the states that have not chosen any of the options put forward by the Centre, the argument was that it should be the Centre which borrows. Coming almost to the end of the day, the feeling was that you can’t decide. We need to talk further. The borrowing has to be done. The
question is how much to borrow. It is not as if the Centre is sitting over money that has to be given to the states. It has to be borrowed.”
What is the dispute about?
The Goods and Services Tax was enforced from 1st July, 2017 after the enactment of the 101st
Constitution Amendment Act, 2016 and with this enforcement, a number of indirect taxes submerged into one. This would mean that the State governments would lose some of their tax collection rights. To combat this, the Center had pledged to compensate the States for the first 5 years, if there be any drop in the GST collection below a particular threshold. The Center also guaranteed tax revenue growth to the tune of 14% every year (base year 2015-16) under the GST Compensation to States Act, 2017.
However, with the slow economic growth since last year and the Covid pandemic this year which made matters worse, the Center started compensating the States sporadically by paying the dues for March this year only in July. The States had not been compensated since April of this year when Sitaraman finally announced at the GST Council meet held on 5th October that “this year’s compensation cess collected amounting to Rs 20,000 crore will be disbursed to the states tonight.” It was also decided that
Rs 24,000 crore of IGST would be disbursed by the end of next week. Additionally, the GST Council gave its nod for levying the compensation cess beyond the agreed period of 5 years ending July 2022.
The estimated dues for the fiscal year ending March, 2021 were earlier thought to be 3 lakh crore. The Center had said that it expects to collect only Rs 65000 crore through compensation cess (which is collected by imposing a cess on luxury and sin goods such as automobiles and tobacco). This left the
States with a staggering Rs 2.35 lakh crore (GST) revenue shortfall. The Centre calculated that shortfall of about Rs 97,000 crore is because of ineffective GST implementation and rest Rs 1.38 lakh crore is due to the impact of COVID-19. According to the revised calculations now, the total loss to the states is estimated at Rs 1.83 lakh crore, as against the previous calculations of Rs 2.35 lakh crore.
The Centre had offered two options to the States late last month- they could either borrow Rs 97000 crore (which was updated to Rs 1.1 lakh crore based on revised calculations) from a special window facilitated by the RBI or raise Rs. 2.35 lakh crore from the market with a proposal of extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 so that they could repay the borrowing.
The government had said, “This year the Indian economy, nay the global economy, is suffering from an exogenous shock, namely the COVID-19 pandemic, whose scope and scale is unprecedented in history. Parliament obviously could not have contemplated a historically unprecedented situation of huge losses of revenue from the base – arising from an act of God quite independently of GST implementation affecting both central and state revenues, direct and indirect. Nevertheless, the operative sections of Section 7 do not make such a distinction. Compensation is payable for the entire shortfall (even if it is not on account of GST implementation). This position has been clarified by the Attorney General and is accepted by the central government.”
At the meet, Kerala’s Finance Minister, Thomas Isaac, after strongly opposing the central government’s move to demarcate the losses based on Covid and non-Covid situations said, “Events like recessions, pandemics, demonetisation etc. were never the considerations when the compensation formula was devised. The compensation law clearly defines how compensation is to be calculated and it has no reference whatsoever to any conditions whether it be act of nature, god or man.”
The opposition ruled states at the meet also demanded for the activation of the legal provision of the dispute resolution mechanism without delay, if there be no consensus in the council.