GST Council | Centre says no compensation beyond June 2022; states take a different view

Finance Minister Nirmala Sitharaman

There will be no fresh Goods and Service Tax Compensation to states beyond June 2022, and the cess that will be collected after that day will only be used to pay back interest and principal of the loans to make up for compensation shortfall due to the COVID-19 pandemic, Finance Minister Nirmala Sitharaman and Revenue Secretary Tarun Bajaj said on September 17.

Addressing the media after the meeting of the GST Council in Lucknow, Sitharaman and Bajaj said that while compensation cess will be collected till March 2026, it will be to pay back the interest and principal of the Rs 2.69 lakh crore total that the centre borrowed and will borrow in 2020-21 and 2021-22, and transferred to states.

This borrowing window over two consecutive years is being provided for states to make up the shortfall in GST compensation cess due to the Covid-19 pandemic.

In 2020-21, the centre borrowed and transferred Rs 1.10 lakh crore to states and this year will borrow and transfer Rs 1.59 lakh crore. Out of this year’s amount, Rs 75,000 crore has already been borrowed and transferred to states.

“From June 2022 to March 2026, the cess that will be collected will only be used to pay the interest and principal on the borrowed amount. The GST (Compensation to States) Act says that compensation period will be five years and those five years end in June 2022,” said Sitharaman.

States still want to be compensated beyond June 2022

This comes even as Delhi Finance Minister Manish Sisodia told mediapersons after the Council meeting that the issue of compensation to states has been referred to a group of ministers which will submit its report in two months’ time.

Central officials later confirmed that a presentation had been given to the states where it was explained to them that how just to repay the previous borrowed amounts, cess will have to be charged. The centre claims that the states understood the situation.

However, state Finance Ministers who were coming out of the meeting still said they would want to be compensated for any revenue loss beyond June 2022. Differences have arisen between centre and states over this issue and may just rise again.

Sitharaman’s latest statements are in contrast to last year, when the centre had in-principle agreed to extend the compensation cess and the shortfall due to states.

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 its finances 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.