GST Council Meet: Compensation Shortfall on Agenda

Last Updated On: Aug. 27, 2020, 11:26 p.m.


The Goods and Services Tax Council meeting happened today i.e 27th August 2020, is expected to be a furious one as states are set to clash with the Centre on the issue of delayed compensation payments. The state should themselves borrow from the market if the Centre is unable to pay GST compensation because of revenue constraints.

The Centre is yet to pay the first instalment of GST compensation to states for the current financial year. These are typically paid out on a bi-monthly basis. They paid about Rs 1.65 lakh crore to states in the financial year 2019-20.

These states are trying to push the Centre to borrow from the market and they are suggesting to them that the compensation cess is levied on more products to raise funds.

Tax collections hit by the pandemic:
They might also extend compensation cess to 10. It is expected that The Centre press states to borrow individually from the markets, depending upon the attorney general's opinion.

The Centre had told the standing committee on finance in July that it may not be able to pay GST compensation due to states as tax collections took a hit due to the economic slump owing to Covid-19 and the subsequent lockdown.

Money raised through the cess is paid to the states as compensation for the loss in revenue because of GST.

This refusal to compensate the states (for GST payments) is nothing short of betrayal," Congress president Sonia Gandhi said on Wednesday after a meeting with the chief ministers of seven states - Maharashtra, Punjab, West Bengal, Rajasthan, Chhattisgarh, Jharkhand and Puducherry.

The Chief Minister of Maharastra Uddhav Thackery says that"If there's no money, how will the states work? It is our right to ask for what's due.


Talking about Financial Crisis-

Punjab chief minister Amarinder Singh said that the state will be in a serious financial crisis due to the lack of funds from GST, which has dropped by over 38% from last year.

It is expected that this Financial Year will be ended with at a deficit of Rs 25,000 crore. All the powers of tax collection is been given to the Prime Minister. A there deny in them saying they can't pay this issue is going to be presented to the Prime Minister

West Bengal also demanded compensation. Chief Minister Mamta Banerjee said the state will need to levy additional taxes to meet the funding shortage as the Centre was yet to pay Rs 4,100 crore as GST compensation.

The states are not ready to accept lower compensation due to the revenue collapse because of the Covid-19 pandemic and the lockdown.

Punjab finance minister Manpreet Badal said more items will have to be brought under the ambit of compensation cess to raise more funds. He also advocated a dispute resolution.


The meeting is being held solely to discuss compensation payments to states for revenue loss on account of GST implementation. It will consider the attorney general's opinion that the council is empowered to take a call on how states have to be compensated and borrowing from the market to meet the shortfall if any.

Bihar deputy chief minister and finance minister Sushil Modi said states can borrow from the market if the Centre stands guarantee.

"This means that the state will be repaid from the compensation cess fund over a much longer duration (tenure of the loan)," he said, but also questioned such a mechanism. "How can that (repayment) be done when the fund is not adequate to meet the monthly requirements."


States could pitch for a mechanism where states may borrow but the Centre would manage the entire borrowing including repayment and interest, an official said.

Sources said that the GST compensation cess requirement of Rs 26,000 crore per month for FY 21 had arisen due to the unprecedented pandemic, nearly double of Rs 13,775 crore paid each month previous fiscal.

As per law, the GST Council shall compensate for the loss of revenue emanating from the implementation of GST, which is different from dual factors of economic slowdown and the pandemic.



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