The 41st GST Council meet chaired by Finance Minister Nirmala Sitharaman was conducted on August 27, 2020. Finance ministers of all the states were a part of this meeting. The meeting comes at a time when there is rising tensions in states regarding revenue shortfall.
As manufacturing and services have taken a major hit during this pandemic, taxing revenue in turn was affected for the states as well as central government. Amid these crucial times, several state governments and citizens expected the meeting to discuss various issues like compensation to states and GST rates revision; revenue shortfall; need of tax rate cut in two-wheeler industry and centre providing a relief to states in FRBM (Fiscal Responsibility and Budget Management) Act.
The meeting focused on the issue related to state compensation and GST rate cut will be reviewed in later phase.
The key outcomes of the meeting are as follows,
Major concern regarding compensation cess, which is the compensation paid to the states by the centre for the possible revenue losses due to the consumption-based nature of the GST was addressed. The centre estimated the Annual GST compensation requirement to be around Rs 3 lakh crore and the cess collection is expected to be Rs 65,000 crore, which means that the total shortfall in the GST collection is at Rs 2.35 Lakh crore.
Out of the total shortfall, Rs 97000 crore is on account of GST shortfall, while the rest is due to COVID-19 pandemic. To compensate the states on account of revenue shortfall, the council proposed two options to the state –
- Borrowing Rs 97000 crore which is significantly less amount and keeping the cess entitlement intact i.e. getting cess later till the decided period.
- Borrowing the entire Rs 2.35 Lakh crore shortfall and pay for it using the cess collected in transition period.
Important point here to note is that the centre assured that it will facilitate the talking with RBI. It will help getting G-security linked interest rates so that each state does not have to struggle for loans. However, the loan will be taken in the names of states and the rates will be same for all the states.
For the states opting for option 1 i.e. Borrowing less and keeping their cess entitlement, they will be given an additional relaxation of 0.5% in FRBM for market borrowing. It means that they can keep their fiscal deficit up to 4% of their GDP.
Not considering any rise in interest rates to make up for shortfall will be welcomed by the state but proposing to move to a market borrowing mechanism would extend the tenure of the cess beyond five years after July 2022. This will be a concern for businesses as well as consumers as they would be required to pay compensation cess.
It was assured by the Finance Minister that two-wheeler GST rate cut has merit and surely needs to be reviewed
A brief GST council meet may be held again as States have requested to lay down both the options and provide a window of 7 working days to deliberate on it and get back with a decision.
Conclusion
In case of both the options, the interest payments will start once the transition period for compensation cess ends. It will be paid from compensation cess which the states are liable to receive. Taking a higher amount, which is opting for second option, the states, for a long period of time will lose out on the revenue which compensates for the losses. GST revenue accounts for around 42% of taxing revenue for state. So, opting for option 1 would provide enough fund to sustain the revenue shortfall. If a state requires additional fund, they can go for market borrowing up to the amount required.
As the council is planning to extend the transition period for compensation cess payment to the state, it would not be beneficial to the public. Citizens will have to pay GST cess even after a pre decided transition period. It means that the citizens and businesses will be affected on account of this move. Certain items classified by the government will remain in the higher tax bracket.
