The revenue gap is due to the impact of the COVID-19 pandemic, which is an “act of God”, says Nirmala Sitharaman
The Centre has presented two options at the GST Council for borrowing by States to meet an estimated GST compensation shortfall of ₹2.35 lakh crore this year. A decision will be taken after seven days.
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The revenue gap is due to the impact of the COVID-19 pandemic, which is an “act of God” that may lead to economic contraction, Finance Minister Nirmala Sitharaman said after the meeting on August 26. “The Compensation Act did not foresee an act of God,” she added, refusing to quantify the percentage of the possible economic contraction.
The Goods and Services Tax (Compensation to States) Act, 2017 provides States with a guarantee that they will be paid for any loss of revenue in the first five years of GST implementation, until 2022. The Centre is legally obligated to pay States if revenues fall below the 14% annual growth in GST collections, using a base year of 2015-16. The money comes from a compensation cess levied on sin and luxury goods.
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Both GST revenues and compensation cess collections have been falling over the last year due to the economic slowdown, exacerbated by COVID-19. In 2019-20, the Centre paid compensation of ₹1.65 lakh crore to States, although the cess collected during the year was only ₹95,444 crore.
After the last meeting of the GST Council, the Centre had sought a legal opinion from the Attorney General, who said that the Centre was obligated to pay the full shortfall from the cess fund, and it was not possible to borrow from the Consolidated Fund of India.
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As per the Centre’s estimates, States’ GST revenue gap in 2020-21 will amount to about ₹3 lakh crore, while cess collections are only projected to reach ₹65,000 crore, leaving a shortfall of ₹2.35 lakh crore. The Centre has calculated that only ₹97,000 crore of this shortfall is due to GST implementation itself, while the rest is due to the impact of COVID-19, Finance Secretary Ajay Bhushan Pandey said.
Mr. Pandey said two options were presented to States at the Council meeting. A special window could be provided to the States for borrowing money from the RBI, at reasonable interest rates, to meet the entire shortfall of ₹2.35 lakh crore or to meet the ₹97,000 crore that is due to GST implementation alone, he said. The amount would be repaid from the cess collections, which could be extended beyond the current five year period which ends in 2022. States have asked for seven working days to consider the proposal.
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Ms. Sitharaman said that there was no attempt by States to politicise the issue in the meeting, adding that “States behaved like statesman”. However, parties were politicising the issue outside the GST Council meeting, she said.
