Compensation to states on the radar at Friday’s 40th GST Council meet

States’ compensation shall top the agenda of the upcoming GST Council meeting. The date of the 40th meeting is yet to be officially announced while it will be held via video conferencing. However, several published reports suggest that it may happen on 12th June 2020. 

The Council is going to meet for the first time since the COVID-19 broke out in India, and cases are soaring each day to reach new highs. Also, it is going to be the first meet after several GST return filing relaxations had been announced in late March 2020 and early May 2020.

States will question their right to better compensation, even after receiving Rs 36,400 crore from the Central Government last week. The release pertained to the December 2019-February 2020 period as stated by two government officials to the Bloomberg Quint publication.

The Central Government must compensate states by the end of every two months ever since GST was rolled out for five years. It is measured at an average annual rate of growth of 14%, maintaining 2015-16 as the base year.

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Since August 2019, the compensation cess collected on sin or demerit goods began to fall short of the stipulated compensation payable. The Central Government had already started to delay payments while releasing payments in tranches to the states.

With GST collections falling sharply since March 2020, states are expected to raise concerns about revenue shortages as they are at the forefront of fighting the pandemic. For March 2020, the collection of GST fell to Rs 78,694 crore as per the data available on the GSTN website. Likewise, the collections for April 2020 as of 5th June 2020 stands at Rs 49,500 crore as per the CNBC TV-18 publication. But the last date for tax payment is towards the end of June 2020 for both these months.

The number is only expected to climb by a few thousands of crores before June-July 2020 ends. The drop can be estimated to be about 40-60% from the annual average collections. The low figures signify the extent to which COVID-19 has hampered business activities. 

The revenue trend is most likely to continue for the next two months, despite unlock 1.0 declared across the nation last week. It is because of a snail-paced rise in the consumption levels and economic activity. It means a substantial burden in releasing state compensation at a point when the tax collections are at its lowest. However, the government officials mentioned above have maintained that the revenue recovery will happen at a faster rate.

The GST Council must now find alternate solutions to pay the states promptly, even as the centre is in a fix due to all-time low tax collections, the two officials said. Both centre and the states would have to come to some consensus. The options include a promise to collect money from the markets with a central government guarantee, or extension to the compensation levy beyond five years and continuing to compensate states with the collections.

Rate rationalisation is never going to be on the agenda. The officials have reiterated that there is no proven study to show that any rate reduction will boost demand. Consumers are curbing spending and saving, and slashing rates is not an answer, as GST is nil on all the necessary amenities.

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