The 41st GST Council meeting held on Thursday, 27th August 2020, on a particular agenda. Union Finance Minister Smt. Nirmala Sitharaman chaired the meeting which was conducted virtually through Video Conference.
The Hon’ble Finance Minister announced a meeting for considering the single-point agenda of payment of cess, which was deliberated in the earlier GST Council meeting – held on 12th June 2020. It was also stated that the meeting will be scheduled in July 2020, however, the date has not been confirmed yet.
Highlights of 41st GST Council Meeting
The 41st GST Council meeting took place through Video Conference and was chaired by Union Financial Minister Nirmala Sitharaman on 27th August 2020. As expected, the single agenda meeting was held for the discussion on the ways to compensate the states.
The Finance Secretary addressed the media around 4.30 p.m regarding shortfall of cess for the Financial Year 2020-21, expecting to be INR 2,35,000 crore. Nevertheless, it was come into observation that it was amounted to INR 97,000 crore in terms of the shortfall – due to GST implementation. It must also noteworthy that, the rest of the amount is not paid due to the pandemic, which is considered to be an Act of god.
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Mitigation of Shortfalls
The states are provided with two options to meet the shortfall of Compensation Cess.
Option I
The center can aid INR 97,000 crore to state as borrowings, through a unique window with RBI’s help, and it can be repaid after completion of 5 years on collection of cess being paid at a fair rate of interest.
Option II
The state can borrow INR 2, 35,000 crore directly from the Reserve Bank of India.
The states should evaluate both the options within 7 working days. The GST Council will again meet to finalize the choices.
Union Financial Minister also answered questions of the press. Whereas the further clarifications given on the announcement are as follows:
- The center will provide a further relaxation of 0.5% in states’ borrowing limit under the Fiscal Responsibility and Budget Management Act, for INR 2.03 lakh crores. The decision was made at an Aatmanirbhar Bharat press conference which was held in May 2020. It will promote states to borrow more depending upon the severity of the impact of COVID-19 pandemic.
- The pros and cons of both options were highlighted. In case the state goes for option 1, it will be allowed to the compensation cess for later years also with the center’s support. Whereas, option 2 includes more borrowing paid by using the cess collected during the transition.
- The arrangement remains valid only for Financial Year 2020-21. Therefore, the GST Council will reassess the situation in April 2021 and decide for the 5th financial year.
- The states can also borrow money with the G-security associated interest rates without any complications.
- Once the GST Council approves the arrangement, the center will clear these dues with the Reserve Bank of India’s help and take care of the rest of the financial year.
- The states must decide based on the compensation they can expect in the future periods/years.
Expectations from 41st GST Council Meeting
Compensation of GST revenue to states by borrowing
There is a shortfall in the compensation collected that has not been sufficient to distribute the necessary revenue share guaranteed to the states. The cess is taxed on goods (Tobacco & Toxic) and certain other luxury goods over and above the GST rates. The states have been guaranteed a five-year return with a 14% increase every year, directly extended up to 2022. The Council will consider ways in which the shortfall can be matched.
Scope of Compensation
There are several options before the GST Council to support the shortfall in revenue allocation to the states. These involve market financings, expanding the scope of items constrained to the compensation or operating with the GST rates. Any improvement in compensation cess on tobacco commodities such as bidis and cigarettes can earn INR 49,470 crore income.
Lately, when the Central Government looked for an opinion of the Attorney General of India, it had suggested going for state financings to fund the debt with the center’s guarantee. It had also declared that the center is not bound to make the compensation. The market financings can be allotted on the base of the future acquisitions from the compensation fund.
Therefore, the GST Council will most probably go for market financings. Despite, the states are in support of bringing more items under the payment cess. The conference may also decide the share of the center and state in the income loss.
Reviewing the Preparedness of the e-invoicing system
The GST Council may also take expeditious update on the level of preparation of the GSTN in performing the e-invoicing system from 1st October 2020.
The next GST Council meeting will be provisionally held on 19th September 2020, covering other issues such as clarifications on the inverted tax structure queries and specific rate rationalization.
Conclusion
The 41st GST Council meeting took place through Video Conference and was chaired by Union Financial Minister Nirmala Sitharaman[1] on 27th August 2020. As expected, the single agenda meeting was held for the discussion on the ways to compensate the states. There are several options before the GST Council to support the shortfall in revenue allocation to the states. These involve market financings, expanding the scope of items constrained to the compensation, or operating with the GST registration.
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