The main agenda for the GST Council meet – how will the states get compensated for the revenue loss?

This 41st GST meet was heated as expected because states demanded that Govt fulfill the task of compensating the states when as stipulated while the Center maintained that they are to compensate only if the shortfall was due to do with implementation of GST but currently, this shortfall is due to the pandemic.

Thus the meet was about the states and the Center working together to resolve the compensation cess issue when the compensation fund is already at rock bottom.

According to the Finance Secretary at the GST meet today, the compensation to the paid to the states would be to the tune of Rs.3 lakh crore vis-à-vis the compensation cess collection of Rs.65,000 crore. Thus there is a gap of Rs.2.35 lakh crore, which can be borrowed from the market.

The GST Council gave two options to the states. Under the 1st Option – a special window will be provided to the states, in consultation with the RBI. This is to provide Rs.97,000 crore at a ‘reasonable rate of interest’ – which is G-security linked interest rates and this money can be repaid after 5 years from collection of cess.

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

Under the 2nd Option – the entire GST compensation gap of Rs 2,35,000 crore of this year can be met by the states, in consultation with the RBI.

The states have asked for seven days to ponder over this and come up with suggestions on the same. The FM stated very categorically that this option presented now is only for the current fiscal given the pandemic situation but in April 2021, the Council will review and decide action for 5th year.

The FM also spelt out the tranches for the states’ borrowings. She said that an increase of 3% to 3.5% (of state GDP) in states' borrowing limit is unconditional.  The 1% increase is to be released in 4 tranches, each one linked with specific reforms and the last 0.5% will be given when milestones in at least 3 of 4 conditions are achieved.

But this increased borrowing limit has a stick – it will be linked to specific reforms to the poor like One Nation One Ration Card, Ease of Doing Business, and power sector reforms.

The market could be a bit disappointed tomorrow as it had expected some revision for the two-wheeler wherein the FM had earlier said that the GST on this sector merits revision. But in today’s meet, the states took over the entire agenda and this issue did not come up at all.

Thankfully, the council agreed that this was not the right time come up with increase in GST taxes. Whew! But yes, it means there is an increase waiting to happen on the horizon.