Government to look into legality of market borrowing by GST Council to compensate states' revenue loss

With cess kitty falling short to compensate the states for revenue loss, the government will look into the legality of GST Council borrowing from market to meet the compensation requirements under the Goods and Services Tax.

Finance Minister Nirmala Sitharaman said this year Rs 80,000 crore has been collected as compensation cess, but states have been given Rs 1.20 lakh crore.

With states raising the issue of shortfall in compensation kitty, there were discussions on resorting to market borrowing to meet the revenue guarantee to states.

"There were suggestions recalling what late Arun Jaitley had said about there can be ways that the Council can probably even borrow from the market. So all this was discussed and I have very clearly said that I am committed to giving the compensation as is being collected," she told reporters after the 39th GST Council meeting here.

Sitharaman further said that after Parliament session gets over, she would at how, if at all, the Council is allowed to borrow - who stands guarantee for it, how will it be paid, what is the interest that will be given.

"All these things will have to be legally looked into. So I have told the Council today that I will have to look at all these things, get more information, legally get the opinion and then come back to the Council as to what I have in my hand. I also said if the Council have to go borrowing I will also have to see what the impact of such a thing will be on the FRBM," she said.

Under the Goods and Services Tax (GST) law, states are guaranteed compensation for revenue loss for five years if their revenue does not increase 14 per cent on the base year of 2015-16.

The minutes of the 7th GST Council meeting state that the chairperson of the GST Council (the Union Finance Minister) had said, "... compensation would be funded out of the cess mechanism, which would have a pool of revenue and if there was any shortfall in this pool, it could be supplemented by some mechanism that the Council might decide".

There were no differences between the Centre and states with regard to compensation payment in 2017-18, 2018-19, and in the first four months of the current fiscal. However, with revenue mop-up from compensation cess falling inadequate, the Centre held back fund transfer to states for revenue shortage beginning August.

Sitharaman said after 2-3 weeks of the conclusion of Parliament session, a special meeting of the GST Council would be called to discuss the idea and the Council can take a considered view.

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.

During July 2017-March 2018, Rs 48,785 crore was released, while between April 2018-March 2019, Rs 81,141 crore was paid to states.

For April-May and June -July last year, Rs 17,789 crore and Rs 27,956 crore were released. Further, Rs 35,298 crore was paid to states as compensation for August-September 2019 and another Rs 19,950 crore was released in February 2020.