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Wednesday, January 20, 2021

As revenues plunge, GST Council may borrow to compensate states

The GST Act extends a guarantee to states that any loss in revenues in the first five years of GST implementation (2017-2022) will be made good through a cess.

Written by Aanchal Magazine , Liz Mathew | New Delhi | June 13, 2020 4:10:11 am
Indian economy coronavirus States had raised the option of borrowing since it was discussed in the GST meetings held in early 2017 too.

With revenue concerns looming large for the Centre and states alike, the Goods and Services Tax (GST) Council on Friday decided to hold a single-point agenda meeting in July which will discuss market borrowing by the Council itself as one of the ways to raise money and compensate states for GST revenue losses.

The GST Act extends a guarantee to states that any loss in revenues in the first five years of GST implementation (2017-2022) will be made good through a cess. If states’ actual revenues are less than projected revenues, the difference would be compensated. The projected revenues for states assume a 14 per cent growth every year, the base year being 2015-16.

In the first two months of the current financial year, cumulative GST revenues of states and the Centre has been only 45 per cent of the monthly target, details of which were shared in the video conference meeting between Union Finance Minister Nirmala Sitharaman and all state finance ministers. In 2020-21, the combined monthly GST revenue target is estimated at Rs 1.21 lakh crore taking into account the budget estimate and states’ protected revenue.

“The critical aspect of the meeting came towards the end when the Centre asked what will happen to compensation given that GST collections have been very low. States said this is not a situation arising from GST issues but unprecedented circumstances, and something needs to be done for compensation. Then it was decided to call a meeting just for this,” an official present in Council meeting said.

Market borrowing as an option was discussed in the previous Council meeting as well, but there were questions about the legality of the Council to borrow; for instance, can it be accorded sovereign status.

“This was a suggestion that came from the Finance Minister. Instead of funds for the compensation going from the GoI Treasury, the GST Council could borrow. This came up today again on the face of revenue shortage. It’s neither approved nor rejected, but everyone agreed it could be an option,” said the finance minister of a state who was a part of the meeting, but did not wish to be named. Other issues such as who will provide guarantee and its impact on FRBM, etc also need further discussion.

In the Council meeting on March 14, there was an extensive discussion on the options available and earlier discussions by former Finance Minister Arun Jaitley on the issue of market borrowings by the Council were cited. Sitharaman had then said the government would look into the legal implications of all options and get back to the Council.

States had raised the option of borrowing since it was discussed in the GST meetings held in early 2017 too. The minutes of the 8th GST Council meeting held in 2017 quote Jaitley as saying that “in case the amount in the GST Compensation Fund fell short of the compensation payable in any bimonthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years.”

Senior finance ministry officials too had earlier indicated that the GST compensation law provides that other such amounts as may be recommended by the Council shall be credited to provide for cess shortfall. The compensation to states has to be provided from the cess that accrues to the Compensation Fund.

The Council also discussed correction of inverted duty structure (where tax rate on output is lower than inputs) for footwear, fertilisers and textiles. Sitharaman said there was an in principle consensus regarding correcting the structure, but the decision was deferred.

According to sources, every state has opposed the Centre’s proposal to change the inverted duty structure right now, which would have resulted in increase in the prices of fertiliser, footwear and ready-made garments. “All of us rejected the proposal. The states were of the view this is not the time to correct the anomalies because any increase in prices will affect the process of economic revival,” Kerala Finance Minister Thomas Isaac told The Indian Express.

Bihar Finance Minister Sushil Modi said given the circumstances now, states did not agree to the proposal. “It’s not that the proposal is completely ruled out. But the states felt it could be done after six months or so,” he said.

The GST Council also provided compliance-related relief to small taxpayers with turnover up to Rs 5 crore, halving the interest on delayed filing of GST returns for February, March and April to 9 per cent, provided the returns are filed by September 2020. Also, the deadline for filing returns for May, June and July has been extended till September, without any interest or late fee.

For May-July, the deadline for filing GST returns has been extended till September 30, without any penalty. No late fee will be levied for delayed filing of GST returns by registered entities with nil liability between July 2017 to January 2020. Late fee for non-filing of monthly sales return for others has been capped at Rs 500 for July 2017 to January 2020 period.

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