41st GST Council Meeting on GST Compensation to States 

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 The 41st GST council meeting was held on Friday under the leadership of honourable Finance Minister Nirmala Sitharaman. The meeting was conducted via video conferencing. The GST council meeting members discussed “GST compensation to states”.  

Here are key 41st GST Council Meeting Updates.

Important 41th GST Council Meeting Updates

GST Collection has been critically impacted this year, due to COVID19. As per GST Compensation Law, states need to be given compensation 41st GST Council meeting was conducted via VC and was chaired by Union FM Nirmala Sitharaman on 27th August 2020. Only a single agenda tabled for the meeting on the methods to GST compensation to states. 

Now, we discuss GST compensation given to states and Compensation Cess. 

GST compensation to states

 The GST Compensation act, 2017 was launched in Lok Sabha on March 27, 2017. The Bill provides for compensation to states for any loss in revenue due to the implementation of GST.  The growth rate of revenue for a state during the five-year period is assumed to be 14% per annum.

GST Compensation Cess

The compensation cess is a cess that will be obtained on the supply of selective goods and services or both till 1st July 2022. The cess will compensate the states for any revenue loss on account of implementation of GST. This cess will not be payable by exporters and those persons who have opted for compensation levy. 

Due to COVID19, the receipts from the compensation cess will be placed in a GST Compensation Fund. Also, the GST compensation cess will be used to give GST compensation to the states for loss of revenue due to the implementation of GST.

As due to the pandemic, the shortfall for the FY 2020-21 goes out to be Rs 2,35,000 crore. Out of this, Rs 97,000 crore is the shortfall due to GST implementation. The states have been rendered with two options to meet the shortfall of compensation cess.

  • Option 1- The centre can facilitate Rs 97,000 crore to states as borrowings, through a special window by the RBI, and this can be returned after 5 years on the collection of cess paying a reasonable rate of interest.
  • Option 2–  The states can acquire Rs 2,35,000 crore directly from the RBI.

Moreover, the states must evaluate both these choices within seven working days when the GST Council will again meet to conclude the choices. 

Additional Clarification on GST Compensation to states

The central Government further clarifications were given on the announcement, as follows:

  • The centre will render a further relaxation of 0.5% in states borrowing limit under the FRBM Act for Rs.2.03 lakh crore.
  •  Relaxation of 0.5% will facilitate states to borrow more depending upon the cruelty of COVID-19 impact.
  • The pros and cons of both choices were highlighted. If the state goes for the first option, it will be allowed to the compensation cess for later years also with support by the centre. 
  • The second option requires more amount of borrowing that is paid by using the cess collected during the transition.
  • The arrangement persists valid only for the FY 2020-21. Hence, the GST Council will reassess the situation in April 2021 and decide for the 5th year.
  • The states can borrow money with the G-security linked interest rates without any obstacles.
  • The states must make a choice based on the compensation cess they can expect in the future periods/years.

So these are the key updates of the 41st GST council meeting.

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