The 41st GST Council meeting was persisted Thursday, 27th August 2020 on a single-point agenda. Union FM Nirmala Sitharaman chaired the meeting conducted virtually via VC.
The Hon’ble FM last announced a gathering for deliberating the single-point agenda of compensation cess within the previous GST Council meeting persisted 12th June 2020. it had been also announced that the meeting would be scheduled in July 2020. However, the date had not been confirmed thus far .
The 41st GST Council meeting happened via VC and was chaired by Union FM Nirmala Sitharaman on 27th August 2020. needless to say , it had been one agenda tabled for the meeting on the methods to compensate the states.
The Finance Secretary addressed the media via VC around 4.30 p.m. The shortfall for the FY 2020-21 works bent be Rs 2,35,000 crore. Out of this, Rs 97,000 crore is that the shortfall thanks to GST implementation, whereas the remainder is taken into account as thanks to COVID-19, which is an act of god. The states are given two options to satisfy the shortfall of compensation cess.
Option I- The centre can facilitate Rs 97,000 crore to states as borrowings, through a special window by the RBI, and this will be repaid after 5 years on the gathering of cess paying an inexpensive rate of interest.
Option II- The states can borrow Rs 2,35,000 crore directly from the RBI.
The states must evaluate both these options within seven working days when the GST Council will again meet to finalise the alternatives .
Union FM took questions from the press, wherein further clarifications got on the announcement, as follows:
The centre will provide an extra relaxation of 0.5% in states’ borrowing limit under the FRBM Act for Rs.2.03 lakh crore. The announcement was made in May 2020 at an Aatmanirbhar Bharat news conference . it'll facilitate states to borrow more depending upon the severity of COVID-19 impact.
The pros and cons of both the choices were highlighted. If the state goes for the primary option, it'll be entitled to the compensation cess for later years also with support by the centre. Whereas, the second option involves more amount of borrowing that's paid by using the cess collected during the transition.
The arrangement remains valid just for the FY 2020-21. Hence, the GST Council will reassess things in April 2021 and choose for the 5th year.
The states can borrow money with the G-security linked interest rates with none hurdles.
Once the arrangement is approved by the GST Council, the centre will proceed to clear these dues with the assistance of the RBI and also lookout of the remainder of the fiscal year .
The states must take a choice supported the compensation cess they will expect within the future periods/years.
Expectations from 41st GST Council Meet
Compensation of GST revenue to states through borrowing
Currently, there's a shortfall within the compensation cess collected that has not been capable distribute the required revenue share promised to the states. The cess is imposed on sin goods and certain other luxury goods over and above the GST. The states are guaranteed a five-year compensation with a 14% increase per annum , presently extended up to 2022. The Council will discuss ways during which the shortfall are often met.
There are various options before the GST Council to fund the shortfall in revenue distribution to the states. These include market borrowings, increasing the scope of things subjected to the compensation cess or twiddling with the GST rates. Any increase in compensation cess on tobacco products like bidis and cigarettes can earn a revenue of Rs.49,470 crore.
Recently, when the Central Government sought an opinion of the Attorney General of India, it had advised going for state borrowings to fund the deficit with the centre’s guarantee. It had also stated that the centre isn't obligated to form the compensation. The market borrowings are often allowed on the bottom of the longer term receipts from the compensation fund.
Hence, the Council will presumably choose market borrowings. However, the states are in favour of bringing more items under the compensation cess kitty. The meeting can also evaluate the share of the centre and state within the revenue loss.
