Rs.20,000 crore compensation cess to be released tonight; impasse over GST dues continues

Speaking after 42nd GST Council meeting, Union Finance Minister Nirmala Sitharaman anunced that GST Compensation Cess collected in 2020 amounting to Rs.20,000 crore will be distributed to all states on Monday night. As per  GST Compensation Cess Act, 2017,  entire cess collected during year must be credited to GST Compensation Cess Fund for providing compensation to states for loss of revenue. Moreover, Council agreed on extending levy of Compensation Cess beyond 5 years to meet revenue gap.

While Council failed to take a decision on borrowing options for meeting shortfall in GST compensation, Sitharaman re-assured states on this front. She mentioned that borrowing which states have been offered is beyond 5% Gross State Domestic Product borrowing limit. Moreover, Sitharaman promised that cess would take care of interest and principal amount of borrowing by states. decision on compensation options has been postponed to October 12. ditionally, an amount of Rs.25,000 crore of Integrated Goods and Services Tax will be released to select states by end of next week. 

Union Finance Minister Nirmala Sitharaman remarked, " discussion happened throughout day in which all states participated. It is true that 20-21 states have written clearly stating that y are opting for option one. To be fair to Council, we did take decision that Cess will have to be extended beyond 5 years for which originally it was extended. fact that interest on borrowing will be paid through cess was well appreciated and welcomed by all. After that, re was a question of some states t wanting option one and states wanting to have option three which y have written to PM about which was forwarded to us and to which, a reply would go."

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Row over borrowing options

Finance Ministry suggested that states could borrow Rs.97,000 crore ( revenue shortfall arising on account of GST implementation and t taking into account COVID-19) with entire principal and interest repayment of debt to be met through cess collection in subsequent years. Furrmore, states have been allowed to borrow an ditional 0.5% points under FRBM Act. But if states opt to borrow entire amount of Rs. 2.35 lakh crore, only principal amount shall be repaid from cess. In such a scenario, states will have to bear interest burden. 

Several states such as Delhi, Jharkhand, West Bengal, Tamil Nu, Kerala, Telangana, Maharashtra and Chhattisgarh have urged Centre to rethink  GST compensation options. Recently, CAG observed that Modi government retained Rs.47,272 crore of GST Compensation Cess collected in Consolidated Fund of India during 2017-18 and 2018-19. This came in for a lot of criticism from opposition parties. 

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