41st GST Council Meet: 2 Options Offered to Meet the Compensation Cess Shortfall

The 41st GST Council meeting took place via teleconference today and was chaired by Finance Minister Smt. Nirmala Sitharaman. This Council meeting was called with the agenda of finding a solution to the compensation cess shortfall the states have been experiencing. This shortfall is a result of both, the decreased economic activity and the COVID-19 pandemic. 

On the conclusion of the Council meeting, the Revenue Secretary Ajay Bhushan Pandey announced at a press briefing that the annual GST compensation requirement stands at Rs.3 lakh crores for FY 20-21. Rs.65,000 crore is expected to be met from the compensation cess collections. Out of the remaining Rs.2.35 lakh crore, he said that a majority would be a result of the coronavirus outbreak this year. According to the Council’s calculations, only Rs.97,000 crore can be attributed to the implementation of GST.

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The Council has proposed two options to the states to meet this gap. The first option is the provision of a special window to the states that entails providing them with Rs.97,000 crore at a special rate of interest. This money can be repaid after five years from the collection of cess. The second option is that the states can meet the entire gap of Rs.2.35 lakh crore themselves, in consultation with the RBI. 

The states have asked for seven days time to think over these proposals and revert to the Finance Ministry. The Finance Minister also stated that the options being offered by the Council will only be available for the current financial year and that the situation in the next year will need to be assessed before a decision is made. The Attorney General of India has also opined that the collection of compensation cess can be extended beyond five years.

For any clarifications/feedback on the topic, please contact the writer at athena.rebello@cleartax.in