41st GST COUNCIL: CENTRE ASKS STATES TO BORROW FROM RBI TO REDUCE THE GST GAP

TOPIC: Indian Economy

The 41st GST Council Meeting was chaired by Finance Minister Shri. Nirmala Sitharaman. The centre acknowledged that states are going to face a GST revenue gap  of 3 lakh crore this year due to COVID-19 pandemic, which Nirmala Sitharaman described it as a "act of God". Compensation cess collections would only bridge 22% of  gap. "Out of the remaining 2.35 lakh crore, only 97,000 crore was due to implementation of GST" said by central.

  41st GST COUNCIL MEETING ON THURSDAY

Compensation gap increases in 2020:

According to the Ministry of Finance, the compensation gap had increased this year due to the COVID-19 pandemic. The shortfall due to the implementation of GST is estimated to be Rs 97,000 crore.

GST Compensation Options:

Following two options were presented by GST Council for compensation to states:
 
1.  A special window is to be provided states, in consultation with the Reserve Bank of India to provide Rs 97,000 crore at a reasonable rate of interest. This money can then be repaid after 5 years from the collection of cess.

a) Centre will facilitate states through RBI in getting loans for portion arising out of GST implementation.

b) The compensation gap arising due to the extraordinary situation and Act of God in the form of COVID-19. Under this, the centre will give further relaxation of 0.5% in states' borrowing limit under the FRBM Act. Hence, the states can choose to borrow more, beyond the expected compensation itself, since the injury has been caused by Coronavirus.
 
2. 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, in turn, have requested a 7-day window to think over and get back to the Finance Ministry regarding the two options. The two options will only be available during the current year. The situation would be reviewed next year in April 2021.

IMPORTANCE OF THE GST COUNCIL MEETING:

According to the Finance Ministry, if a state goes for Option 1, it will borrow less but its compensation entitlement will be protected. The states essentially have two choices:
 
1. Borrowing less and getting cess later.
2. Borrowing more and pay for it using cess collected during the transition period.

The central government had last released GST compensation of Rs 13,806 crore to states for March 2020. The total compensation paid to the states in 2019-20 was Rs 1,65,302 crore whereas the amount of cess collected during the period  was Rs 95,444 crore, a shortfall of Rs 70,000 crore.

This shortfall was made good by digging into the balance of cess amount collected during 2017-18 and 2018-19. In addition, Centre had transferred Rs 33,412 crore from Consolidated Fund of India to the Compensation Fund as part of an exercise to apportion balance of IGST pertaining to 2017-18.

As per the provisions of GST law, the Centre would compensate states for loss of revenue due to introduction of GST for the first five years (2017-2022). The loss to revenue is calculated assuming a 14 per cent growth per annum on the base year figure of 2015-16 of the taxes subsumed in GST.

MY OPINION: The Centre stated that COVID-19 Pandemic is a act of god, so they would not compensate the loss of revenue during implementation of GST. So this would be a unfair to all the states. So centre has to borrow money from market and allot to states to bridge the loss of revenue during GST implementation.

                                        ©Copyright by politicaloutlookbydeepakb.blogspot.com