42nd GST Council meeting begins, FM Nirmala Sitharaman chairs meet

Union Finance Minister Nirmala Sitharaman is chairing the 42nd Goods and Services Tax (GST) Council meeting via video conferencing on Monday.

The GST Council could possibly into a stormy affair, as non-BJP ruled states still are still in disagreement with the Centre on the compensation issue. 

In the last meeting held on August 27, the GST Council presented two options to states regarding GST compensation including a special window in consultation with the Reserve Bank of India (RBI) to provide Rs 97,000 crores at a reasonable interest rate and that the entire GST compensation gap of Rs 2,35,000 crores this year can be met by them in consultation with RBI.

In the current fiscal, the states are staring at a staggering Rs 2.35 lakh crore Goods and Services Tax (GST) revenue shortfall. Of this, as per Centre's calculation, about Rs 97,000 crore is on account of GST implementation and rest Rs 1.38 lakh crore is the impact of COVID-19 on states' revenues.

The Centre in August gave two options to the states to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from market and has also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.

The non-BJP ruled states are at loggerheads with the Centre over the issue of funding the shortfall.

Chief Ministers of six non-BJP ruled states - West Bengal, Kerala, Delhi, Telangana, Chhattisgarh and Tamil Nadu -- have written to the Centre opposing the options which require states to borrow to meet shortfall.

While these states want the Centre to borrow to meet the shortfall, the Centre has argued that the revenue accruing from GST compensation cess goes to the states and the Centre cannot borrow on the security of the tax it does not own. Under the GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs.

On top of the highest tax slab, a cess is levied on luxury, sin and demerit goods and the proceeds from the same are used to compensate states for any revenue loss.

Attorney General of India K K Venugopal had given his legal view on the compensation cess issue where he has opined that there is no obligation on the Centre under the GST laws to compensate for the loss of revenue.

He had opined that the GST Council has to find ways to meet any revenue shortfall arising out of GST implementation.

The payment of GST compensation to states became an issue after revenues from the imposition of cess started dwindling since August 2019.

(With inputs from agencies)