GST Council likely to meet in July on compensation issue

Shishir Sinha New Delhi | Updated on June 14, 2021

Extension of 5-year period, keeping rate at 14% will form crux of talks

The Goods & Services Tax (GST) Council is likely to meet next month to discuss the compensation issue.

“Meeting on compensation is expected in July. States may raise the issue related to borrowing to meet the current fiscal’s compensation shortfall,” a senior Government official told BusinessLine.

At the council meeting on May 28, it was decided to borrow ₹1.58-lakh crore during the current fiscal.

On May 28, Finance Minister Nirmala Sitharaman announced that there will be a special meeting of the council on compensation. She had said: “We are in the last of 5 years of 14 per cent compensation. Even from last year, there has been a worry if there will be an opportunity to extend it beyond July 2022. So, I have assured the members that there will be a special session only to discuss that one agenda: how the compensation cess will collected, how long it will be collected and how much will be collected beyond July 2022.”

Compensation is being provided to the States for the loss of revenue arising on account of implementation of the GST. For this, FY2015-16 has been taken as base year while the growth rate of revenue for a State is assumed to be 14 per cent per annum. For the payment of compensation, cess is being levied on certain goods in the 28 per cent bracket.

Key issues

As the economy took a pandemic hit and GST collection dipped, the Centre borrowed ₹1.10-lakh crore and passed it on to the States on a back-to-back basis. This borrowing is to be repaid out of the future cess receipts. For this purpose, the GST Council has already approved extending the levy of compensation cess beyond June 2022 till the entire shortfall is covered.

Now, apart from setting the deadline for collection of cess, there are more issues that need to be addressed: Should the period of compensation be extended beyond five years? If yes, then till when? In such a situation, should the 14 per cent rate of protected revenue need be revised?

Considering lower revenue and higher expenditure on account of the pandemic, Prateek Bansal, Associate Partner (Tax & Custom) at White and Brief, says it may be imperative to extend the 5-year compensation window to give respite to the reeling State economies. This will also be in line with the scheme and objective of the GST (Compensation to States) Act, 2017.

Borrowing plan

However, given that the Centre has already borrowed ₹1.10-lakh crore in FY 21 and plans to borrow ₹1.58- lakh crore during FY 22, and considering that a few States have had lower annual revenue growth rate in the pre-GST era as compared to 14 per cent, it may not be economically feasible to commit to the compensation for another 5 years at 14 per cent per annum revenue growth rate.

“To strike a balance between the Centre’s and the States’ interests, the GST Council may decide to extend the compensation period for another couple of years at the specified 14 per cent growth rate, or alternatively, extend the compensation period for 5 years (as being demanded) with a reduction in annual estimated revenue growth rate,” he said.

Published on June 13, 2021

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