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Sitharaman links GST shortfall to Covid: ‘Act of God’ may result in economic contraction this fiscal

GST Council meeting: Finance Minister Nirmala Sitharaman said the GST shortfall in FY21 was around Rs 2.35 lakh crore and two options of compensating states were discussed.

By: Express Web Desk | New Delhi | Updated: August 27, 2020 8:13:31 pm
Finance Minister Nirmala Sitharaman with MoS (Finance) Anurag Thakur at the GST Council meeting on Thursday (Twitter/Ministry of Finance)

GST Council meeting: Claiming that an “Act of God” may result in contraction of economy this fiscal, Finance Minister Nirmala Sitharaman, who chaired the 41st GST Council meeting, said the GST shortfall in FY21 was around Rs 2.35 lakh crore. Following a marathon five-hour meeting, Sitharaman said two options of compensating states were discussed while asserting that there was no proposal to raise tax rates to make up for the shortfall.

“Compensation gap has risen this year (expected to be Rs 2.35 lakh crore). This shortfall is due to Covid-19 as well. Shortfall in compensation due to implementation of GST has been estimated to be Rs 97,000 crore,” said Revenue secretary Ajay Bhushan Pandey.

The first option presented to the GST Council was on providing a special window to states, in consultation with RBI, for borrowing Rs 97,000 crore at a reasonable interest rate. “The amount can be repaid after five years (of GST implementation) ending 2022 from cess collection,” Pandey said. The second option before the states is to borrow the entire Rs 2.35 lakh crore shortfall under the special window.

EXPLAINED | Breaking down GST: slabs, payments, dispute

Sitharaman said states had requested a seven-day window to think over and get back to the Finance Ministry. “This year we are facing an extraordinary situation… we are facing an act of God which might even result in a contraction of the economy,” she said.

“These options will be available only during current year. The situation will be reviewed next year in April and decision made on what is best for the country,” Sitharaman said.

Compensation payments to states are pending for the four months of this financial year — April, May, June, and July. The Revenue secretary said the total GST compensation to be paid to states was Rs 1.5 lakh crore. “This is so because there was hardly any GST Collection in April and May,” he said.

Following a marathon five-hour meeting, Sitharaman said two options of compensating states were discussed. (Twitter/Finance Ministry)

Sitharaman said both the options hinged upon the fact that borrowing would be done by the states.

“We very clearly said in both the options… that we shall facilitate talking to the Reserve Bank and getting it at a G-Sec proportionate number of years linked rate for all the states so that each state does not have to go running for the loan and face different situations and in the process the bond yields (turn) higher. So, we said we will facilitate it, but the borrowing can be done in the name of the states and all states roughly can get the same rate of interest,” Sitharaman said.

Pandey said Attorney General KK Venugopal opined that the compensation gap cannot be met from the Consolidated Fund of India and suggested that the compensation cess levy could be extended beyond 5 years to meet the shortfall.

The Centre had in March sought views from the Attorney General on the legality of market borrowing to make good the shortfall in the compensation fund — a corpus created from levy of additional tax on luxury and sin goods to compensate states for revenue shortfall arising from their taxes being subsumed into GST.

Under GST law, states were guaranteed to be compensated bi-monthly for any loss of revenue in the first five years of the GST implementation from July 1, 2017. The shortfall is calculated assuming a 14 per cent annual growth in GST collections by states over the base year of 2015-16.

Compensation payments to states started getting delayed since October last year as GST revenues started to slow down. The Covid-19 pandemic has widened the gap, with GST revenues declining 41 per cent in the April-June quarter.

Saying that it was “dissatisfied” with the outcome of the GST Council meeting, Congress accused the Centre of adopting a majoritarian approach and thrusting “solutions” on states.

“I appeal to the Centre that if some states are not agreeable to their proposals, they should not force the solutions on states. The Centre should activate the dispute resolution mechanism in the GST Council, so that states have legal recourse to what they do not agree upon,” Punjab’s FM Manpreet Badal said.

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