GST Council: States to get ₹20,000 cr compensation cess collected in FY21

Our Bureau. New Delhi | Updated on October 06, 2020 Published on October 05, 2020

Finance Minister Nirmala Sitharaman chairs the 42nd GST Council meeting via video conferencing in New Delhi, on Monday   -  PTI

States to also get ₹24,000-cr IGST dues as borrowing issue remains unresolved

The GST Council meeting on Monday remained inconclusive on the issue of borrowing to meet the compensation shortfall and will meet again on October 12.


But the Council agreed to release ₹24,000 crore I-GST (Integrated Goods & Services Tax) for the financial year 2017-18 to States, which had not received the full amount as only a temporary settlement was made at that time. It has also been decided to disburse immediately to States/UTs the ₹20,000 crore collected so far this fiscal year through the compensation cess.

“It is not correct that States that are not going for any borrowing option will not get anything. No State/UT is going to be denied compensation. Nobody ever thought that there will be a pandemic. However, compensation will be paid whether shortfall is on account of GST implementation or on account of the pandemic,” Finance Minister Nirmala Sitharaman told media persons after the day-long meeting of the Council. She also reiterated that borrowing will have to be done.

Two options

On August 27, the Centre offered two options to States/UTs for borrowing to meet the compensation shortfall during the current fiscal. States/UTs could either borrow ₹97,000 crore (the shortfall on account of GST implementation) via a special window facilitated by the RBI or borrow from the open market the ₹2.35-lakh crore (shortfall on account of GST implementation issue plus the pandemic effect).

The Centre said that 21 States/UTs have opted for the first option. However, barring Odisha and Andhra Pradesh, non-BJP ruled States such as West Bengal, Punjab, Kerala, Delhi, Telangana, Chhattisgarh and Tamil Nadu are opposing the borrowing plan. There was also a demand to rework the calculation of the shortfall assuming 10 per cent nominal GDP growth.

The Finance Minister said that based on the suggestions given by State officials, a change has been made in the first option (borrowing of ₹97,000). Now, the growth assumption has been lowered to 7 per cent and, accordingly, the borrowing amount will jump to ₹1.10-lakh crore. Under the first option States will not have to pay interest.

Compensation cess

Sitharaman also said the Council has decided to increase the time period for levying the compensation cess beyond 2022. “Out of the compensation cess collected beyond 2022, first it will be charged for interest on borrowing, then for 50 per cent of the principal amount and then for the remaining amount,” she said while adding that officials will decide the time line for levy beyond June 2022.

Commenting on Monday’s proceeding, Divakar Vijayasarathy, Founder of DVS Advisors, felt though the Centre has increased the borrowing limit under the first option, it is not expected to pacify the opposition-ruled S\tates and they can be expected to stick to their guns at the upcoming meeting on October 12 forcing the Centre to either constitute a committee of ministers or formulate a dispute resolution mechanism to bring consensus.

Amidst all this, the decision to disburse the compensation cess collected till date to the States, resolution of IGST devolution and decision of only quarterly returns for small taxpayers are welcome and indicates the Council's ability to resolve other pending issues in spite of the differences on the compensation issue, he said.

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Published on October 05, 2020
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