The Goods and Services Tax (GST) Council met today virtually and discussed the agenda of compensation to states and GST rates revision. The meeting was chaired by the union minister of finance Nirmala Sitharaman.
States have not been compensated since May. GST collection has been severely impacted this year, due to the pandemic. “As per GST Compensation Law, states need to be given compensation”, the Finance Secretary Ajay Bhushan Pandey said.
The members discussed ways to address the issue of revenue shortfall, including borrowing from market, as COVID-19 pandemic affects the entire Indian economy.
During the meeting two options were presented by Sitharaman, “One is to provide a special window to states, in consultation with RBI to provide Rs 97,000 crore at a reasonable interest rate. The other one is 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 seven days”.
The centre said it will give a further relaxation of 0.5% in states’ borrowing limit under FRBM Act as second leg of Option one. “States can choose to borrow more, beyond expected compensation itself, since that is the injury caused by coronavirus,” Sitharaman said.
She further added, “There may be some states that might prefer to get hard-wired compensation rather than going to market to borrow. The option was tailor-made so that states can take a call depending on compensation they expect to come”.
Key Highlights Of The Council Meet
- Under the current GST structure, taxes are levied under four slabs — 5, 12, 18, and 28 percent. The government also charges a cess on luxury, sin, and demerit goods on items under the 28 percent tax slab. The funds collected via this cess are shared with states to meet the revenue shortfall. Since FY16, states are entitled to get a 14 percent hike in revenue for the next five years till 2022, though COVID-19 has badly hit the Centre’s coffers. The Centre has been of the view that states can be compensated for the revenue shortfall from compensation cess only.
- The central government had last released GST compensation of Rs 13,806 crore to states for March 2020. The total compensation paid to the states in 2019-20 was Rs 1,65,302 crore whereas the amount of cess collected during the period was Rs 95,444 crore, a shortfall of Rs 70,000 crore.
- Motorcycles, scooters, and mopeds are in the highest slab of 28% GST right now. A 10% cut to the next slab of 18% will see a significant reduction in prices. The sale of two-wheelers has declined by over 60% in the first four months of this fiscal so far. Motorcycles are witnessing a faster recovery in sales.
- The central government released more than Rs 1.65 lakh crore as GST compensation to states for FY20, including Rs 13,806 crore for March. The total amount of compensation released for 2019-20 is Rs 1.65 lakh crore, whereas cess amount collected was Rs 95,444 crore.
- The compensation gap is due to the coronavirus pandemic as well. The shortfall in compensation due to the implementation of GST has been estimated to be Rs 97,000 crore.