Economy

GST Council yet to convene meeting on compensation cess

Shishir Sinha New Delhi | Updated on July 29, 2020 Published on July 29, 2020

July is coming to a close, but the GST Council is yet to schedule a meeting for discussing compensation cess. On June 12, Finance Minister Nirmala Sitharaman had talked about ‘one-point agenda’ meeting to be called in July on compensation cess.

In fact, the issue again came up during the Parliamentary committee meeting on Tuesday, where Finance Ministry officials expressed the Centre’s difficulty in paying GST compensation to States. On Monday, the Centre claimed settling the compensation for full fiscal 2019-20 by paying over ₹1.65 lakh crore as against cess collection of ₹95,444 crore.

Goods and Services Tax (Compensation to States) Act, 2017 mandates payment of full revenue compensation for the first five years from the date of introduction of GST. It is paid bi-monthly while last installment for a financial year is given in the next year.

For calculating the compensation amount, the projected nominal growth rate of revenue subsumed for a State during the transition period has been fixed at 14 per cent per annum. For calculation 2015-16 has been taken as the base year. Cess is levied on various goods and services, falling in the category of 28 per cent slab to pay the compensation.

Saloni Roy, Senior Director at Deloitte India, says the GST law has not envisaged a situation where the compensation collections would not be adequate to pay States their due. “Considering the compensation fund is entirely dependent upon collection of compensation cess, a lower collection of such cess could lead to deferment of compensation to States,” she said.

Rajat Bose, Partner at Shardul Amarchand Mangaldas & Co, feels Centre does not have much scope of expressing its inability to pay the Cess to the State Governments.

“The GST (Compensation to States) Act, 2017 makes it mandatory for the Central Government to compensate the States in the prescribed formula for a period of 5 years from the date of implementation of GST, i.e., till 2022,” he said.

Three options

There are three options before the Centre to deal with such a situation: raise the rate of cess on various goods or services or raise the GST rates on goods and services falling the the 5 per cent or nil category, which will be counter-productive considering lower demand; defer the payment, which will become a political issue; borrow from the market, which neither some States nor experts think is advisable.

Roy said borrowing can create additional pressures on the government, in terms of interest payment. “The law does not specifically contain provisions relating to borrowing from market in case of shortfall in compensation cess collections,” she opined.

Bose listed two challenges in borrowing funds. First is the legal aspect of whether the government can borrow funds to offset its liability under the GST (Compensation to States) Act, 2017.

Even if there is an avenue under the said regulation or otherwise, other considerations such as who will borrow the funds, how will the collateral be given will also need to be thought through.

The second challenge is repayment of the borrowing.

“The Centre will need to generate funds to repay the loan, which could potentially mean either increase in rate or ambit or the period of collection of cess,” he said.

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Published on July 29, 2020
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