Moneycontrol PRO
Open App

GST Council meet: FM Sitharaman gives states 7 days to choose between two options to bridge compensation gap

The GST Council chaired by Finance Minister Nirmala Sitharaman gave states 7 days to choose between two options to bridge the GST compensation gap.

August 27, 2020 / 10:27 PM IST

At the 41st GST Council meet on Thursday, Finance Minister Nirmala Sitharaman gave states two options to bridge the funding gap created due to economic losses caused by COVID-19.

States have been demanding compensation from the government to meet the shortfall in revenue caused by lockdowns to curb spread of COVID-19.

Sources told Moneycontrol, Centre presented Attorney General's opinion to the GST Council which said the government is not obliged to compensate for losses due to COVID-19. However, according to the GST Law, Centre is expected to pay compensation to states for the states' loss of revenues because of subsuming of taxes.

The outbreak of COVID-19 and the nationwide lockdown imposed to tackle it, brought economic activities to a standstill. This has exacerbated the compensation issue so much so that the Centre now is not in a position to compensate states if the current method of calculation has to be followed.

Sitharaman said states have seven working days to think over the options and decide.


The two options suggested by the GST council are as follows:

Option 1: To provide a special window to states, in consultation with RBI, to provide the Rs 97,000 crore at a reasonable rate of interest; this money can then be repaid after five years from the collection of cess.

Option 2: Entire GST compensation gap of Rs 235,000 crore of this year can be met by the states, in consultation with RBI.

FM Sitharaman said these options will be available to the state only during the current year. The situation will be reviewed next year and the GST Council will meet again soon to take further stock of the situation.

The options were given after the Attorney General clearly stated that the Compensation gap cannot be met from the Consolidated Fund.

The compensation gap of Rs 2.35 lakh crores this year is due to COVID-19 as well and the shortfall in compensation due to the implementation of GST has been estimated to be Rs 97,000 crores.
Moneycontrol News
first published: Aug 27, 2020 05:29 pm
ISO 27001 - BSI Assurance Mark