Tamil Nadu may go with Option-1 for GST compensation, but seeks tweaks

State reiterates that Centre is bound to compensate the shortfall in GST collections and should find necessary funds for the purpose if there was a shortfall in cess collections

The Tamil Nadu Government indicated that it might go with option-1 for the GST compensation, provided some aspects of it are reworked.

Addressing the 42nd GST council Meeting today, Tamil Nadu's Minister for Fisheries and Personnel and Administrative Reforms, D Jayakumar, said that the Government of India has a moral and legal obligation to pay compensation for the shortfall in GST collections and should find the necessary funds to compensate States, if there was a shortfall in the cess collections. 

During the 41st GST Council meeting, Tamil Nadu had suggested that the Government mobilise resources and lend the funds required to the GST Compensation Fund. The loan could then be serviced through an extension of the GST Cess for a few years beyond 2021-22. This was a very reasonable and practical suggestion and was agreed to by almost all States, said the Minister.

However, this has not been accepted by the Government of India.  In the last meeting on August 27, the Chairperson had given two options to the States. Both entail borrowings from the open market by State Governments. 

In an effort to limit the total amount of borrowing in 2020-21, under Option-1 an artificial distinction is being drawn between GST implementation-based losses and Covid-induced losses. Any attempt to carve out losses solely on account of GST vitiates the delicately balanced pact between the Centre and the States that this August Council has held so dear since the introduction of GST regime, the minister said.

"I am heartened by the clear and explicit statement in the note which was circulated earlier that under the operative sections of the GST (Compensation to States) Act, 2017, compensation is payable for the entire shortfall in revenue collection, even if it is not on account of GST implementation. Further, this position has been clarified by the Attorney General and is accepted by the Central Government.  It has also been stated that the balance shortfall will be made good in subsequent years. It is important that this position is explicitly reiterated in a formal communication to the States," said Jayakumar.

For the current financial year, partial release of compensation may be a compulsion.  But this ought not to be justified based on the presumptive loss solely on account of introduction of GST.  It is a fait accompli that given the fiscal situation, States have to remain content with receiving only a portion of the compensation.  Further, the State Governments had pointed out in the meeting conducted by the Union Finance Secretary that the assumption of 10 per cent normal growth in the Option-1 is highly unrealistic and unwarranted, Jayakumar said.  Hence, instead, revenue gap of States must be assessed based on an appropriate proportion of the total anticipated loss this financial year under Option 1. Option 2 has been worked out to be completely unattractive and unacceptable to almost all States. 

"In such circumstances and given the very limited options available, Tamil Nadu chooses Option 1 in the hope it will be reworked to reflect a higher proportion of the actual loss in revenue of States," said Jayakumar, asking the Council guidance in resolving the issue of compensation to the State in a timely manner preserving the mutual trust which is the bedrock of GST and also to expedite the payment of IGST settlement dues.

The Group of Ministers constituted for the purpose of examining the issue of IGST settlement for 2017-18 has finalised its report, acknowledging Rs 4,321 crore is due to Tamil Nadu towards IGST settlement for the year 2017-18. 

He urged for immediate release of the dues of Tamil Nadu in one installment as recommended by the Group of Ministers.

He added, in 2020-21, for the period upto July 2020, compensation of Rs 12,258.94 crore is due to be paid to Tamil Nadu.  

It is a matter of grave urgency that the GST compensation payments are made immediately to enable the State to continue to battle against Covid-19, Jayakumar said.