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

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

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

Union Finance Minister Nirmala Sitharaman remarked, "The discussion happened throughout the day in which all the states participated. It is true that 20-21 states have written clearly stating that they are opting for option one. To be fair to the Council, we did take the decision that the Cess will have to be extended beyond the 5 years for which originally it was extended. The fact that the interest on the borrowing will be paid through cess was well appreciated and welcomed by all. After that, there was a question of some states not wanting option one and states wanting to have option three which they have written to the PM about which was forwarded to us and to which, a reply would go."

Read: Credible Signs Of Economic Growth In September; GST Collection Up 4% YoY: Finance Ministry

Read: Telangana Seeks Release Of IGST Dues Immediately

Row over borrowing options

The Finance Ministry suggested that states could borrow Rs.97,000 crore (the revenue shortfall arising on account of GST implementation and not taking into account COVID-19) with the entire principal and interest repayment of the debt to be met through cess collection in subsequent years. Furthermore, the states have been allowed to borrow an additional 0.5% points under the FRBM Act. But if the states opt to borrow the entire amount of Rs. 2.35 lakh crore, only the principal amount shall be repaid from the cess. In such a scenario, the states will have to bear the interest burden. 

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

Read: DMK MP Accuses FM Of Diluting GST Compensation Issue, Demands White Paper On Economy