GST Council to Meet on 27th August; Compensation Cess Discussion on the Table

The GST Council has scheduled the 41st council meeting on 27th August, with the agenda to comprise just the issue of compensation to the states. Due to weak economic activity in FY 2019-20, the compensation cess collections had not been enough to meet the shortfall of revenues of the states. The pandemic further escalated this deficit. 

The GST Council had promised the states that any shortfalls in revenue due to the implementation of GST, would be met through the compensation cess. This cess had been imposed on specified luxury and sin goods. The projected revenue figures of the states, post-GST, were based on a 14% year-on-year increase. Now, the states are pushing the centre to borrow funds to close this revenue gap.

In 2019-20, the centre compensated the states for a total of Rs 1,65,302 crore, against a Rs 95,444 collection only. To pay off the difference, the balance of funds remaining from FY 2017-18 and FY 2018-19 was utilised. The centre further transferred Rs 33,412 from the Consolidated Fund of India. 

The council will now discuss various other options such as market borrowings or adding more items under the purview of the compensation cess. For market borrowings to materialise as an option, the states and the centre need to see eye-to-eye on who will borrow and take on the guarantee. The situation is even more critical at the moment due to the pandemic worsening overall revenue collections.

The GST Council even announced the date of the following council meeting. The 42nd meeting will be held on 19th September. However, that meeting will be based on other persisting issues such as the inverted duty structure, the revision of tax rates, and measures to ease doing business.

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

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