GST Council meet: ₹2.35 lakh crore tax shortfall, Centre places two options before states


New Delhi: Finance minister Nirmala Sitharaman on Thursday chaired the 41st meeting of the Goods and Services Tax (GST) Council to discuss on compensating states for revenue shortfall. The Centre provided two options before the states to meet the shortfall in the GST revenues.

The total shortfall in collection of GST estimated at 2.35 lakh crore, said revenue secretary Ajay Bhushan Pandey. Out of the total shortfall, 97,000 crore is on account of GST shortfall, while the rest is due to COVID-19 pandemic, Pandey added.

The two options before states are 1) A special window can be provided to the states, in consultation with the Reserve Bank of India, at a reasonable interest rate for borrowing of 97,000 crore. The amount can be repaid after five years (of GST implementation) ending 2022 from cess collection. 2) The second option is to borrow the entire 2.35 lakh crore shortfall under the special window.

The government will provide a further relaxation of 0.5% in states’ borrowing limit under FRBM Act as second leg of the first option, said finance minister while briefing the media.

If a state goes for option 1, it will borrow less, but its compensation entitlement will be protected, she added. So choice is between borrowing less and getting cess later or borrow more and pay for it using cess collected during transition period, said Nirmala Sitharaman.

“States have been given seven days’ time to think over the proposal,” finance secretary added.

Commenting on the two options provided before states, Ravishankar Raghavan, tax counsel at Majmudar & Partners, said “Finance Minister’s suggestion to have a common meeting ground by facilitating states with RBI borrowings at low interest rates is welcome. However, from a states’ perspective the devil could be in the details that are yet to be finalised and accepted. It is likely that the compensation issue will take some weeks to get ironed out.”

“Considering the current scenario of economy, the states might be left with no other option but to insist the council to consider increasing the cess or including more products or extending the levy of cess by some more years. In the case of approaching RBI instead of the market to avoid making the interest yield dearer to the states seems logical,” said Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP.

Sitharaman added the economy is facing an extraordinary ‘Act of God’ situation, which may result in economic contraction.