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GST Council meet: No consensus yet on compensation dues, says FM Nirmala Sitharaman; 12 states accept Centre’s solution

New Delhi: Finance Minister Nirmala Sitharaman on Monday (October 12) said that 12 states have accepted the Centre’s solution on the Goods and Services Tax (GST) compensation dues, while there’s no consensus on the issue yet. The GST Council meeting was held today after the previous meeting, on October 5, had also ended in a deadlock over the issue.

The stalemate over compensating states for the shortfall in GST collections continued on Monday with the GST Council meeting ending without reaching any consensus. This was the third meeting in a row that discussed compensation shortfall without a decision.

The panel, which is the highest decision-making body on indirect taxes, for the second time in a week, failed to reach a consensus on the Centre’s proposal of states borrowing against future GST collections to make up for the shortfall.

Addressing media persons, the Finance Minister, who heads the Council, said the government is seeking time to consider demands of 9 other states, adding that among members there was a question on whether the GST Council can order that either the Centre borrow or states borrow.  

Sitharaman said, “Every state has a business to do what it wants about its own borrowing. GST Council has been gracious enough in unanimously agreeing to extend cess beyond 5 years.” 

According to FM Sitharaman, states sought clarifications on why the Centre cannot borrow on behalf of states and the government provided an explanation for the same. 

The Finance Minister said that the Centre has already issued the borrowing calendar for this fiscal and going beyond the calendar would immediately jack up the bond yields, adding “The g-sec yield will go up and if this went up then the borrowing cost will increase.”

Sitharaman assured that states’ borrowing would not mean a chaotic situation, as the Centre would facilitate states so that some states don’t end up paying high-interest rates while others obtain loans at a reasonable rate.

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She further said, “We are open to anyone (State) who wants us to facilitate any loan. A lot of people have chosen Option 1, and some will approach us tomorrow morning. We are ready to deal with it.” 

In its previous meeting last week, the GST Council had decided to extend the surcharge on taxes on luxury goods such as cars and tobacco products beyond June 2022 but failed to reach a consensus on ways to compensate states for loss of tax revenue.

The projected total compensation shortfall in the current fiscal stands at Rs 2.35 lakh crore.

In August, the Centre had given two options to the states — to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from the market. It had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.

Following a demand by some states, the amount of Rs 97,000 crore was increased to Rs 1.10 lakh crore. As many as 21 states — which are BJP-ruled or have supported it on various issues — have opted to borrow Rs 1.10 lakh crore to meet the compensation shortfall.

The Centre has released Rs 20,000 crore to the states towards compensation shortfall so far in the current fiscal. Under the GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs.


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