GST Compensation Gap Can't be Met from Consolidated Fund: AG

In the 41st Goods and Services Tax (GST) Council meeting held in the capital, the revenue secretary informed that the GST collections were severely impacted due to coronavirus pandemic this year. At the meeting, two options of compensating states were discussed, including borrowing from the Reserve Bank of India (RBI). 

The meeting comes in the backdrop of certain guarantees provided in the GST laws to the State Governments under which the states get compensated for any loss of revenue in the first five years of GST implementation which came into effect from July 1, 2017. However, due to the Covid-19 outbreak, the compensation cess collection have jumped. 

The finance minister made it clear that the options discussed for meeting GST shortfall are only for the current fiscal. The GST Council will look at the issue again in April next year, she said.  

Kapil Rana, Founder and Chairman, HostBooks said: "The GST Council meeting brings out the clarity on the reimbursement of compensation periodicity which is June 2017 to July 2022 i.e. 5 years. Since the compensation gap cannot be met from the Consolidated Fund of India, the Government is working on various modalities and one of them is that compensation cess levy can be extended beyond 5 years, to meet the shortfall. This is a welcome move that the GST council has not proposed any increase in Tax Rates." 

Divakar Vijayasarathy, Founder & Managing Partner, DVS Advisors LLP said: “The states would have had a fair idea of what is coming their way considering the opinion of Attorney General was clear that the centre is not liable to pay for the compensation. However, the bifurcation of the shortfall as due to GST and due to Covid would have not been expected. The decision making has again been postponed by another 7 working days. 

Parag Mehta, Partner, NA Shah Associates said: “At this moment all the states were heavily dependent on the Centre for compensation. In the initial two years of GST the government had transferred the excess collections in Compensation Fund to Consolidated fund of India. There was also a reverse process in subsequent years when there was a shortfall in Compensation Fund.” 

After 5-hour-long meet, the GST Council held a video press conference with the media. “GST collection has been severely impacted this year, due to Covid-19 pandemic. As per GST Compensation Law, states need to be given compensation,” Finance Secretary said during the conference. 

The finance secretary informed that central government released more than Rs 1.65 lakh crore as GST compensation to states for FY 2019-20, including Rs 13,806 crore for March. Attorney-General said that GST Compensation has to be paid for a transition period- from July 2017 to June 2022. Ajay Bhushan Pandey, Finance Secretary said revenue has to be protected compensation gap to be met from cess fund, which in turn has to be funded from levy of cess. 

Compensation gap which has arisen this year (expected to be Rs 2.35 lakh crore), is due to Covid-19 as well. The shortfall in compensation due to the implementation of GST has been estimated to be Rs 97,000 crore said the Finance Secretary. 

AG’s clear opinion was that compensation gap cannot be met from India’s consolidated fund. Option-1 presented to GST Council was to provide a special window to states, in consultation with RBI to provide Rs 97000 crore at a reasonable interest rate. Option-2 presented to GST Council was that the entire GST compensation gap of Rs 2,35,000 crore of this year can be met by states, in consultation with RBI. These options will be sent to states for a view within 7 Days and will apply for this fiscal year only the finance secretary informed.