Compensation Issue Remains Unresolved Even After Extended 42nd GST Council Meeting

Union Finance Minister (FM) started the press briefing that the meeting which was conducted on 12th October 2020 is in continuation of the 42nd GST council meeting which was conducted on 5th October 2020 and this is not a separate 43rd GST council meet.

The extended 42nd GST Council meeting ended with no unanimity on the borrowing issue to make up the shortfall of compensation cess. As no conclusion was reached the options previously provided to states are still open. 

Also, it’s been clarified that the Centre will not be able to borrow funds to meet the compensation cess shortfall as this will increase the yield on G-sec bonds. It has been explained that the Centre has issued a borrowing calendar already, and if it goes beyond it to borrow, the G-Sec deals used as a benchmark for every other borrowing will go up. This will increase the borrowing costs for states and the private sector as well.

The FM reiterated that the levy of compensation cess would continue beyond the five years, as was announced in the 42nd GST Council meeting. It is also clarified that the cess collected July 2022 onwards will not be disbursed to the states and the same will be utilised solely for repayment of interest and principal. Hence, there will be no burden on the states regarding repayment of the borrowings made.

Also Read: Interest Subvention Scheme for MSME Extended Up to March 2021

At the end of the extended 42nd GST council meeting, the FM appealed to states to agree upon an option on the borrowings of the compensation shortfall. She also pointed out that the Centre can not stop the agreed states from moving further by saying that the dissenting states have to get on consensus to make borrowings. 

Also, she informed the press that there is no dispute between the Centre and states regarding the compensation issue. It is just a difference of opinion among states which can be resolved by making more discussions.

The Centre will move forward in this issue once the states get to consensus and agree to an option. The states are front liners in fighting against COVID-19, and they require more funds in this pandemic situation. We might expect a resolution sooner on this issue as there has already been extensive discussion happening for the two times.

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

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