41st GST Council Meet Highlights

The Goods and Services Tax Council met today in their 41st GST council meeting to discuss the GST compensation to states for the shortfall in revenue collections. This meeting was led by Union Corporate Affairs and Finance Minister, Nirmala Sitharaman.

The story so far

In the previous GST council meeting held on June 12th 2020, the GST Council had announced a waiver on late fees for late filing of returns between July 2017 to January 2020. The agenda for today’s meeting centred around the Centre’s compensation to States due to a shortage in revenue collections. Obviously, due to the COVID-19 pandemic, the Centre is not in a position to make this compensation and as such there was an impending debate on whether it should be the Centre who borrows funds and passes it on to States or whether States should borrow funds and make payments based on future receipts. Earlier this year, the Centre had approached Attorney General K K Venugopal for his thoughts on the legality of market borrowing by the GST Council to make up for the revenue shortfall. The Attorney General had announced that the Centre did not have an obligation to make up for a shortfall in revenue collections.

States that do not see at least a 14% annual growth in GST revenue are supposed to be compensated for the shortfall till 2022. However, after a large compensation was doled out by the Centre to the States before the pandemic, they did not have enough funds to carry out another round of compensation.

Highlights of the 41st GST Council meeting

Two options before States to deal with a revenue shortfall

The GST Council has presented two options to States with regard to resolving the shortfall in revenue collections. The Centre facilitates availing of loans for the States through the Reserve Bank of India, but only for that portion arising out of GST implementation. Meaning, the Centre will provide a special window to States, in consultation with the RBI to provide the ₹97,000 crores at a reasonable rate of interest. This loan can be repaid after five years from the collection of cess. Additionally, the gap arising in compensation due to the extraordinary situation and Act of God in the form of COVID-19. This means a State will borrow less, but their compensation entitlement will be protected. Alternatively, they can borrow more and pay for it using cess collected during the transition period.

Seven days to think and revert, say States

States have asked the Centre to give them 7 working days to think about the options before them. The Finance Minister has clarified that these options are only valid for the current year and might be renewed after a review of the economic situation in the next year.