GST Council meet ends without reaching consensus on compensating states

The stalemate over compensating states for the shortfall in GST collections continued on Monday with a meeting of the GST Council ending without reaching any consensus.

The panel, which is the highest decision-making body on indirect taxes, for the second time in a week failed to reach a consensus on the Centre's proposal of states borrowing against future GST collections to make up for the shortfall.

This was the third meeting in a row that discussed compensation shortfall without a decision.

Finance Minister Nirmala Sitharaman, who heads the Council, said the Centre cannot borrow and pay states for the shortfall as it would lead to rise in bond yields, resulting in rise in borrowing costs for the government and the private sector.

However, this would not be the case if states borrowed against future GST receipts, she said, adding 21 states had agreed to borrow as suggested by the Centre.

However, other states insisted on a decision to be taken by consensus, she said.

"We were not able to arrive at a consensus," Sitharaman said.

In its previous meeting last week, the Council had decided to extend the surcharge on taxes on luxury goods such as cars and tobacco products beyond June 2022 but failed to reach a consensus on ways to compensate states for loss of tax revenue.

The projected total compensation shortfall in the current fiscal stands at Rs 2.35 trillion.

The Centre had in August given two options to the states -- to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 trillion from the market. It had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.

Following a demand by some states, the amount of Rs 97,000 crore was increased to Rs 1.10 trillion.

As many as 21 states -- which are BJP-ruled or have supported it on various issues -- have opted to borrow Rs 1.10 trillion to meet the compensation shortfall.

The Centre has released Rs 20,000 crore to the states towards compensation shortfall so far in the current fiscal.

Under the GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs.

On top of the highest tax slab, a cess is levied on luxury, sin and demerit goods, and the proceeds from the same are used to compensate states for any revenue loss. But due to a slowdown in the economy, collections have fallen short of the money needed for compensating states.