GST Council meet on Thursday, to mull Centre's compensation default

The GST Council will meet here on Thursday to take up the single-point agenda of GST compensation to states affected by delays in the release by the Centre, a government official privy to meeting agenda said.

The meeting was earlier proposed in July, as announced by Union Finance Minister Nirmala Sitharaman after the first GST Council meeting in the backdrop of Covid-19 pandemic in June.

"The Council will meet tomorrow with a single-point agenda to discuss the compensation cess. Any changes in the GST rates or cess structure would also relate to how timely compensation to the states could be released," the official said.

Faced with sharp decline in GST collections due to the nationwide lockdown and disruptions in economic activities across the country, one of the options before the Centre is to pay GST compensation to states by using a portion of its borrowings.

The compensation has not been paid to the states since March. Even the compensation for March was delayed and paid in late July.

A legal opinion on the matter sought by the Centre from the Attorney General earlier suggested that the former is under "no obligation to pay GST compensation shortfalls to the states" and it is the GST Council which has to decide on making good the shortfall in the goods and services tax compensation fund by putting sufficient amount into it.

The AG had opined that the GST Council can recommend to the Centre to allow the states to borrow on the strength of the future receipts from the compensation fund, sources said.

It would, however, be for the central government to take a final decision in the matter under Article 293(3) of the Constitution.

"If there is a need for borrowings to meet compensation to the states and who is going to borrow? How are we going to pay for it?" The Finance Minister had said about the Council meeting in June, hinting that the fall in revenues has become a huge cause of concern for the Centre to meet its liability towards the states as per the GST legislation.

Under the GST law, states are guaranteed full compensation for any revenue loss for the first five years after the introduction of the Goods and Services Tax (GST) in July 2017.

The compensation is the difference between actually revenue collected and projected revenue. The projected revenue is revenue growth of 14 per cent for the states per year over the base year 2015-16.

As per the GST Act, full compensation to the states has to be paid for a period of five years till FY22 only through the compensation fund that gets its money through the levy of GST compensation cess on a few items.

However, with the fund not getting enough collections since August 2019, the GST compensation to the states has been delayed. The Centre is now looking at getting GST Council nod for a mechanism to finance the compensation.

The situation vis-a-vis the GST revenue has worsened in April 2020, with several states indicating a shortfall in collections to the tune of 80-90 per cent of the average monthly collections during this time of the year.

In fact, Delhi has said its GST collections may end up at a mere Rs 300 crore in April as against a collection of Rs 3,500 crore in the same month previous year.

Other states like Tamil Nadu, Assam, West Bengal, and Andhra Pradesh are also facing severe revenue decline due to shrinking economic activities during the Covid-induced lockdown. The problem has continued into May as well.

With economic activity and GDP growth projected to remain subdued for most part of FY21, the Centre is looking at all possible means on how it could meet its constitutional obligation of compensating the states for their revenue losses.

After February, when the Centre released GST compensation of Rs 19,950 crore for October and November 2019, the Centre has cleared dues for December, January and February only now.

In late July, the Centre released Rs 13,806 crore to the states as compensation for their revenue losses in the GST goods regime for March 2020.

"The total amount of compensation released for the year 2019-20 is Rs 1,65,302 crore whereas the amount of cess collected during the year 2019-20 was Rs 95,444 crore," a government statement had said.

The monthly compensation requirement for the states in 2020-21 is pegged at Rs 20,250 crore, government sources said, which leaves a big gap between what needs to be paid and what is getting collected.

Even in FY21, monthly cess collections could be at a low Rs 7,000-8,000 crore, or even lower.

According to previous releases of the Finance Ministry, in the FY 2017-18, a total GST compensation cess of Rs 62,611 crore was collected, of which Rs 41,146 crore was released to the states/UTs as GST compensation.

In the FY 2018-19, Rs 95,081 crore was collected as GST compensation cess, of which Rs 69,275 crore was released to the states and UTs as GST compensation.

As on March 31, 2019, Rs 47,271 crore collected as GST compensation cess remained unutilised after the release of GST compensation to the states and UTs in the FYs 2017-18 and 2018-19.

Since the end of August 2019, the central government has started realising the impending precarious position in paying the GST compensation to the states and UTs as the compensation cess requirement was twice of the average monthly cess collection.

The sources said that though the GST Council also has the option to either bring in more items under the cess base by expanding the base of GST cess items, or to increase cess rate on the existing items. Any increase in compensation cess on a few items could yield only about Rs 2,000-3,000 crore a year.

Therefore, the Council in its earlier meeting also discussed other options like forego full cess compensation, which was increasing @14% per annum, or to go ahead with whatever compensation is available.

One more option looked at was to raise the tax rate on items through rationalization via shuffling of slab rates..