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42nd GST Council Meet: No decision on borrowing issue to meet compensation gap; next meeting on October 12

The gap in compensation arising due to the extraordinary situation due to COVID-19 will be paid out of the cess which gets collected after 5 years.

October 06, 2020 / 07:10 AM IST

The Goods and Services Tax (GST) Council couldn't come to a consensus on the issue of borrowing to meet the compensation shortfall and the Council would again meet on October 12 to deliberate on the same.

"This year's compensation cess collected amounting to Rs 20,000 crore will be disbursed to the states tonight," Finance Minister Nirmala Sitharaman said at the 42nd GST Council meeting.

Sitharaman said the GST Council took up the long-pending issue of Integrated Goods and Services Tax (IGST), as earlier there was no formula for devolution of IGST, which had resulted in several anomalies in its distribution.

"It has been decided that Rs 24,000 crore of IGST would be released to the states that had received less earlier. The amount will be disbursed by the end of next week," the minister said.

A committee under the chairpersonship of Bihar Deputy Chief Minister Sushil Modi has worked out a way to resolve IGST devolution issue and states that received less would get Rs 24,000 crore. However, the states which ended up getting more will not be asked to return the extra amount immediately, but will have to do it eventually.

The finance minister also said that FY21 cess collected so far, worth Rs 20,000 crore, will be disbursed tonight.

The Council also extended the GST compensation cess beyond 2022. However, on the issue of borrowing options to meet revenue shortfall, there was no consensus.

"Entire compensation is going to be paid back to the states. Compensation shortfall which has arisen due to GST implementation or due to COVID-19 is all going to be given back to the states," Sitharaman said.

Sitharaman said that some changes have already been made, based on states' inputs, to the borrowing options to meet the compensation gap shortfall. Instead of Rs 97,000 crore provided as the first borrowing option earlier, the amount now has been made Rs 1.1 lakh crore.

On repayment schedules, the minister said interest on borrowed amount will be the first charge on the cess which gets collected beyond 5 years and the next charge could be 50 percent on the principal amount which gets borrowed.

"The gap in compensation arising due to the extraordinary situation due to COVID-19 will be paid out of the cess which gets collected after 5 years," Sitharaman said.

The borrowing that states have been offered to meet GST compensation gap is beyond 5 percent gross state domestic product (GSDP) borrowing limit, and the borrowing would not be taken into consideration by the Finance Commission's assessment of state borrowings vs GSDP, Sitharaman said.

She also said that neither interest nor principal needs to be paid from states' own other resources as the cess will take care of it, and thus won't be a burden on the states.

"Law requires that compensation is paid. Levy of compensation has been extended beyond 2022. Compensation gap remaining in 2022 will be paid, so the question of law has been addressed," finance secretary Ajay Bhushan Pandey said.

Kamalika Ghosh
first published: Oct 5, 2020 07:38 pm