Exclusive| GST Council: Decision on mode of compensation extension unlikely today

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The Goods and Service Tax Council is unlikely to reach a final decision on the ways in which to extend compensation to states beyond June 2022, Moneycontrol has learnt.

It is understood that the centre has given a presentation to states and laid out options on how the compensation can be extended beyond its end-date next year. However, the states are likely to be given time to decide which option suits them best, said an official who is aware of the deliberations in the GST Council meeting.

"The centre believes that beyond June 2022, annual compensation of Rs 1 lakh crore should be enough. States believe that more than that is required," said an informed source.

The person added that any decision on either the mode of compensation beyond June 2022 or on inclusion on petroleum products under GST is unlikely today, though the latter topic has also been discussed in the Council meeting.

The meeting of the all-powerful federal body, being chaired by Finance Minister Nirmala Sitharaman and being attended by all but seven state Finance Ministers, is currently taking place in Lucknow. Sitharaman will address a press conference after 6.30 PM.

Moneycontrol understands that one of the options being given to the states is continuing compensation in lieu of tax shortfall at a much lower rate than the existing 14 percent. It could be 11 percent or lower.

It is also learnt that the centre is presenting to states some revenue enhancement measures which will enable them to depend less on the shortfall compensation from the centre.

While the centre had in-principle agreed to extend the compensation cess and the shortfall due to states last year itself, the modalities and details are being the Lucknow meeting.

When the GST came into being, states had agreed to join the new tax regime provided they were compensated for any revenue loss in the first five years from July 1, 2017 to June 2022.

Section 18 of the Constitution (101 amendment) Act, 2016 and Section 7 of GST (Compensation to State) Act, 2017 permits that the loss of revenue will be compensated to states at the end of every two months for five years. The shortfall is calculated assuming a 14 percent annual growth in GST revenue over the base year of 2015-16.

As per the centre's perspective, the pandemic has hit the finances of the centre as much as the states and hence to compensate states at an assumed rate of 14 percent GST growth, something which was decided pre-COVID, may no longer be possible.

For the current 2021-22 financial year, the centre has already released Rs 75,000 crore to the states and union territories to compensate them for the shortfall in GST revenue.

This is not the first time that states have been presented options on compensation due to GST shortfall.

In the GST Council meeting on August 27, 2020, in light of a massive hit to revenues due to the COVID-19 pandemic, Sitharaman had proposed two options to states - to either borrow Rs 1.1 lakh crore (on account of GST implementation) through a special window facilitated by the RBI, or to borrow the complete shortfall of Rs 2.35 lakh crore (including Rs 1.8 lakh crore due to COVID) from the market. The states were given time, and most had chosen the first option.

The states whose Finance Ministers are not attending the current meeting in Lucknow are Gujarat, Maharashtra, Tamil Nadu, Karnataka, Chhattisgarh, Meghalaya and Mizoram.