KEY HIGHLIGHTS OF THE 41ST GST COUNCIL MEETING

1. KEY HIGHLIGHTS OF THE 41ST GST COUNCIL MEETING On 27th August 2020, Finance Minister Nirmala Sitharaman chaired the 41st GST Council meeting virtually with states to discuss the contentious issue of GST compensation cess and revenue gap for this financial year. In this article we discuss the key highlights of the meet and the implications they pose for future actions. The GST (Compensation to States) Act 2017 was introduced to guarantee compensation to every state owing to any loss incurred on account of implementation of the Goods and Services Tax for a period of five years.1This compensation is fulfilled through the levy of a compensation cess calculated at 14% growth rate on the base year of 2015-2016 and paid into the cess fund. However, due to the pandemic, this year both the cess and revenue have taken a major hit with a deficit of about Rs. 2.35 lakh crore.2 To make good on their promise, the council offered the following options available under Section 7 of the GST Compensation Act 2017: 1The GST (Compensation to States) Act 2017. 2https://www.businesstoday.in/current/economy-politics/gst-meet-live-updates-gst-compensation-nirmala- sitharaman-press-meet/story/414227.html

2. 1. A Centre facilitated borrowing of Rs 97000 crore from the Reserve Bank of India with reasonable interest rates. This loan could be repaid after 5 years by extension of cess collection. 2. Disbursement of the entire Goods and Services Tax compensation gap of Rs 2.35 lakh crore at once with consultation from RBI. While both the options suggest borrowing, they differ on the amount of loan and interest accrued. Option 1, as explained by the ministry, offers less borrowing with the benefit of availing compensation cess later. This option not only comes with the Centre support but also with a relief of 0.5% under Fiscal Responsibility and Budget Management Act, 2003. Option 2 on the other hand, stands big on the borrowing amount with payment to be made using the cess collected during the transition period. The ministry also laid down the following clarifications in the meet: Loan options will be available at G- linked security rates. The loan options are available as a temporary measure for only this fiscal year and are subject to review next year. The revenue gap cannot be met from the Consolidated Fund of India. States will be given 7 days working time to decide. While the GST council believes that it is only liable to meet the implementation gap of 97000 crore and not the revenue gap due to COVID19, the states have expressed otherwise. Currently there is no legal obligation on the council as the act is silent on when the compensation is not met. Nevertheless, the attorney general has clarified that the compensation could well be paid by extending the stated 5 years. It will be interesting to watch out for future meetings with growing state demand to take up loans in Centre’s name than their own. We might also witness an increase in cess for tobacco or more items being covered under the compensation cess to increase revenues.