GST compensation: States told to opt for a cut or extended payment period

31 Aug 2020


 The centre has given states the option of an extended compensation period beyond the five-year period ending 2022 to make up for the estimated Rs2.35 lakh crore shortfall in GST compensation to states. 

Alternatively, finance minister Nirmala Sitaraman has given states the option of a reduced compensation, which is in line with the massive contraction of the national economy and those of the states.
States, however, have sought a week to deliberate on the two options offered by the centre to make up for the shortfall in GST collections, the finance minister said at the end of a five-hour meeting of the GST Council on Wednesday.
"The centre may convene another GST Council meeting once the states have decided their options and the RBI agrees to the Centre’s proposal," Sitharaman said.
Sitaraman said it is the “hand of God” that led to the tanking of the economy and the subsequent shortfall in GST collection, leading to an expected Rs2.35 lakh crore compensation gap this year.
The centre has estimated GST looses to the tune of Rs1,38,000 crore due to the pandemic, which in turn would cause a Rs97,000 crore shortfall in compensation amount due to states. The centre has given the option to states to avail of a window under which they can borrow 0.5 per cent of their GDP without any conditions.
"Under the second option, the entire gap of this year can be met by the borrowing of states, and arrangements could be made with the RBI," said Sitharaman, but implied reforms in power tariff etc. She complimented the participants at the GST Council for displaying statesmanship by focusing on the issue at hand.
Opposition-ruled states have opposed the central government’s proposal that the states borrow money to plug a shortfall in their revenue from the Goods and Services Tax (GST). Instead they want the centre to borrow or the RBI to print currency to compensate the states.
The finance ministers of Congress-ruled states said they were not happy with the outcome of the meeting as decisions were thrust upon them by the Centre.
Officials of some states also demanded an increase in the period of payment of compensation for GST revenue loss by the Centre to the states from the present five years until 2022 to 10 years. 
West Bengal finance minister Amit Mitra suggested that the Centre pay the compensation from the various cesses it collects and compensate the states rather than raise states’ debt burden.
Mitra considers the 14 per cent annual increase in GST revenue assured to the states for five years until 2022 as “sacrosanct” while Delhi deputy chief minister and finance minister Manish Sisodia says the central government’s refusal to give GST compensation to states is a “betrayed.” 
BJP-ruled Uttar Pradesh asked for payment of around Rs12,000 crore compensation for the revenue shortfall caused largely by the Covid-19 lockdown during the current financial year.
No interest to be charged on past delays in GST payment 
The Central Board of Indirect Taxes & Customs (CBIC) today clarified that the notification dated 25 August 2020 relating to interest on delayed payment of GST has been issued prospectively due to certain technical limitations and that no recoveries shall be made for the past period as well by the central and state tax administration in accordance with the decision taken at the 39 meeting of GST Council. This will ensure full relief to the taxpayers as decided by the GST Council.
CBIC explanation came in response to an assortment of comments in the social media with respect to notification dated 25 August 2020 regarding charging of interest on delayed payment of GST on net liability (the tax liability discharged in cash) with effect from 1 September 2020.

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