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August 27, 2020

GST Collection severely impacted due to COVID19 compensation cess levy can be extended beyond 5 years Highlights of 41st GST Council Meeting

by facelesscompliance in GST

GST Collection severely impacted due to COVID19 compensation cess levy can be extended beyond 5 years Highlights of 41st GST Council Meeting

GST Collection has been severely impacted this year, due to COVID19. As per GST Compensation Law, states need to be given compensation

As mentioned by Finance Minister in the GST Council meeting held in March 2020, the legal views of the matter was sought from the Attorney General of India

Attorney General said that GST Compensation has to be paid for transition period – from July 2017 to June 2022 Revenue has to be protected Compensation gap to be met from cess fund, which in turn has to be funded from levy of cess

The Attorney General’s clear opinion was that the compensation gap cannot be met from the Consolidated Fund of India He suggested that the compensation cess levy can be extended beyond 5 years, to meet the shortfall

Option 1 presented to GST Council To provide a special window to states, in consultation with RBI, to provide the ₹ 97,000 crore at a reasonable rate of interest, this money can then be repaid after 5 years from collection of cess

Option 2 presented to GST CouncilEntire GST compensation gap of ₹ 2,35,000 crore of this year can be met by the states, in consultation with RBI

States have requested a 7-day window to think over and get back to FM

These options would be available only during current year, situation would be reviewed next year and decision made on what is best for the country – Finance Secretary

Once the arrangement is agreed upon by GST Council, we can proceed fast and clear these dues and also take care of the rest of the financial year. These options shall be available only for this year; in April 2021, the Council will review and decide action for 5th year, says FM

During April – July 2020, total GST compensation to be paid is ₹ 1.5 lakh crore, this is so because there was hardly any GST collection in April and May

Annual GST compensation requirement is estimated to be around ₹ 3 lakh crore, and cess collection is expected to be around ₹ 65,000 crore, leaving us with an annual compensation gap of ₹ 2.35 lakh crore – Revenue Secretary

1st option has two legs

1) Centre facilitating states through RBI, in getting loans – for that portion arising out of GST implementation

2) The gap arising in compensation due to the extraordinary situation and Act of God in the form of COVID19

There may be some states which may prefer to get the hard-wired compensation rather than going to the market to borrow more The option was tailor-made considering that states can take a call depending on the compensation they expect to come – Finance Minister

The Govt. will give a further relaxation of 0.5% in states’ borrowing limit under FRBM Act as second leg of Option 1. States can choose to borrow more, beyond the expected compensation itself, since that is the injury caused by COVID19 – Finance Minister

If a state goes for Option 1, it will borrow less, but its compensation entitlement will be protected So choice is between i) borrowing less & getting cess later, & ii) borrow more & pay for it using cess collected during transition period

This is developing story ……

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