GST compensation: Sitharaman keeps states guessing

On 12 June, Finance Minister Nirmala Sitharaman had said the council would be meeting in July to discuss only ‘one-agenda item’ of paying compensation to states for the shortfall in their GST revenue. However, no such meeting has been announced yet even as the month ends.

Hyderabad: The GST (goods and services tax) council members last month agreed to meet in July to discuss the grave issue of paying compensation to states for the shortfall in their GST revenue. The month is about to end, and there is no sign yet that a meeting would be taking place anytime soon.

At the 40th GST council meeting held on 12 June, Finance Minister Nirmala Sitharaman had said that the council would meet again in July to discuss only “one-agenda item” – compensation cess.

“Compensation, which has to be given to states, and, if at all, it results in some kind of borrowing, how and who is going to pay for it,” she had said while announcing the meeting.

However, no such meeting has been convened so far.

Expressing his disappointment, Kerala Finance Minister Thomas Isaac on Wednesday tweeted: "According to news reports the hearing before the Standing Committee on Finance, Centre has taken the stand that GST Compensation can't be paid and present arrangements be revised by Council. Such a brazen betrayal of federal trust! Convene the Council meeting immediately as promised."

Talking to Etv Bharat on the proposed meeting, GST expert Pritam Mahure said: “The meeting is very critical from states’ perspectives as they need to get clarity on their revenue numbers. Lower collection of compensation cess is becoming a big cause of worry for states as their compensation is paid from that amount.”

What is the issue?

According to the Goods and Services Tax (Compensation to States) Act, 2017, the state governments have been assured a 14% increase in their annual revenue (keeping FY 2015-16 revenue as the base) for first five years of the implementation of GST (till 1 July 2022).

In case there is a shortfall in a state’s revenue in any fiscal year, the Centre commits to compensate it using the GST compensation cess, according to the law.

The Centre collects a compensation cess that is levied in addition to regular GST on goods mostly belonging to the luxury and demerit categories falling in the category of 28% slab. The money collected is then used to compensate states on a bi-monthly basis for any revenue shortfall.

Now, states of late have been complaining about delays in payment of GST compensation, which is putting pressure on their finances.

On Monday, the Union government cleared Rs 1.65 lakh as GST compensation to states for the previous fiscal year ended March 2020 (FY20). However, compensation payments for the period starting April 2020 are still pending.

The finance ministry, meanwhile, has highlighted that paying compensation was getting difficult as the compensation cess collection fell 42% in FY20.

The ministry said the government had to utilise the balance cess amount of the previous two fiscal years to compensate states, besides transferring some money from the Consolidated Fund of India (a fund which includes all the central government’s revenue generated from taxes, asset sale, earnings from state-run companies, etc).

Possible solutions

To recall, the Centre had in fact sought views from Attorney General K.K. Venugopal in March on the legality of market borrowing by the council to make good any shortfall in the compensation fund.

Citing sources, a PTI report on Thursday said: “The Attorney General is of the opinion that the Centre has no statutory obligation to make up from its coffers any shortfall in GST revenues of states and the State governments may now have to look at market borrowings against future revenue mop-up.”

(ETV Bharat Report)