Single-agenda GST Council meeting on Aug 27 to discuss compensation

Likely to be a stormy affair with divergent views on market borrowing; Next meeting on September 19

Expanding the scope of the compensation cess under the goods and services tax (GST) regime will be part of the deliberations at the much-anticipated ‘single-agenda’ GST Council meeting on August 27 to thrash out an alternative compensation mechanism for states in light of inadequate cess collections.

It will hold another meeting on September 19 to discuss other issues such as the e-way bill on gold and overarching tech changes in GST returns.

Increasing the cess period by another two to five years, widening the coverage of the compensation cess to include more goods and services, raising cess on existing items, and borrowing from the market to meet the shortfall will be discussed. The meeting is expected to be a stormy affair with divergent views likely to be aired. This is because the Centre will likely press states to borrow to make up for the shortfall, but states want either the Centre or the GST Council to do so.

Attorney General KK Venugopal recommended to the Centre to allow states to borrow on the strength of future receipts from the compensation fund. Most states are opposed to this, arguing that it will be financially inefficient.

                                         

States will pitch for a two to five-year extension of the GST compensation period beyond the promised five years up to 2022. Also on the agenda is a proposal to bring goods and services that earlier attracted 28 per cent tax under the compensation kitty.

Bihar Deputy CM Sushil Kumar Modi told Business Standard that the idea of states borrowing was not feasible, arguing that eventually they will have to provide a guarantee for the borrowed amount, which would mean an increase in the fiscal deficit by 1-1.5 percentage points.

“It seems unlikely there will be a surplus in the compensation cess fund in the next five years. It is not feasible for the states to borrow as it will mean that the compensation cess will have to be extended by another 5-10 years to repay the loan,” said Modi. He added that even if revenue collections in 2020-21 are projected at 65 per cent of the revenues collected in 2019-20, there would be a gap of Rs 2.67 trillion for states.