Finance Secretary Ajay Bhushan Pandey who attended the 41st GST Council Meet on the agenda of making up for the shortfall in states’ revenues amid the pandemic, said that the Attorney General's clear opinion was that compensation gap cannot be met from India's consolidated fund. Therefore there are two options. Option 1 that was presented to GST Council was to provide a special window to states, in consultation with RBI to provide Rs 97,000 crores at a reasonable interest rate.
While Option 2 presented to GST Council was that the entire GST compensation gap of ₹ 2,35,000 crore of this year can be met by states, in consultation with RBI. These options will be sent to states for a view within 7 Days and will apply for this fiscal year only.
Once the arrangement is agreed upon by GST Council, we can proceed fast and clear these dues and also take care of the rest of the financial year. These options will be available only for this year; in April 2021, the Council will review and decide action for 5th year, said Finance Minister Sitharaman.
The government will give a further relaxation of 0.5 per cent in states' borrowing limit under FRBM Act as 2nd leg of Option 1. States can choose to borrow more, beyond expected compensation itself, since that is the injury caused by COVID-19, Sitharaman added.
Sitharaman further said, "there may be some states which may prefer to get hard-wired compensation rather than going to market to borrow more. The option was tailor-made considering that states can take a call depending on the compensation they expect to come."
Meanwhile, the annual GST compensation requirement is estimated to be around Rs 3 lakh crores, and cess collection is expected to be around Rs 65,000 crores, leaving us with an annual compensation gap of Rs 2.35 lakh crores, said Revenue Secretary.
During April-July 2020, total GST compensation to be paid is Rs 1.5 lakh crores, this is so because there was hardly any GST Collection in April and May, Revenue Secretary added.
Compensation gap which has arisen this year (expected to be Rs 2.35 lakh crores), is due to COVID-19 as well. The shortfall in compensation due to the implementation of GST has been estimated to be Rs 97,000 crores, Finance Secretary said.
He also informed that the Attorney General said protected revenue has to be protected but the compensation gap to be met from cess fund, which in turn has to be funded from levy of cess.
As mentioned by Finance Minister in GST Council meeting held in March, legal views of the matter were sought from the Attorney General of India who said that GST compensation has to be paid for transition period from July 2017 to June 2022, Finance Secretary added.
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