The Goods and Services Tax (GST) Council has scheduled two important meetings on August 27 and September 19, according to senior Government sources. Finance Minister Nirmala Sitharaman had earlier mentioned that the Council’s 41st meeting on August 27 would discuss a single matter: compensation to states for revenue losses under the indirect tax regime.

As compensation cess collection has plummeted amid weak economic activities due to the Covid-19 pandemic, GST collection in 2020-21 is unlikely to see enough growth to meet this shortfall. As a result, the 41st meeting GST Council headed by the Union Finance Minister is likely to see efforts to resolve the differences between Centre and states over responsibility of the cess liability.

The Council will weigh several options such as market borrowing to fund compensation deficit, adding more items under compensation cess, and/or rationalising tax rate, HT quoted two officials as saying.

States and the Centre have voiced differing opinions on the proposal for market borrowing. The Attorney General of India’s legal opinion stated that the Centre is not obligated to pay for the revenue shortfall and the Centre can allow states "to borrow on the strength of future receipts from the compensation fund", with the central government taking the "final decision in the matter".

States argue that the compensation corpus will not have enough funds to cover for the borrowing, and that it is the Centre’s responsibility to pay compensation on time. States, thus, are more in favour of expanding the ambit of compensation cess and raising tax rates to build revenues.

"There is virtually no money left to pay compensation to states from April. Market borrowing is one of the solutions, but who will take the guarantee is a big question and that issue needs to be resolved," one official said.

When the new indirect tax regime was introduced in July 2017, the GST law assured states of a 14 per cent increase in annual revenues for five years (up to 2022) — with the revenue shortfall made good through compensation cess levied on luxury goods like automobiles and and sin goods like liqour, cigarettes and other tobacco products.

Compensation cess collected in 2017-18 and 2018-19 was higher than the GST compensation paid in those years. While in 2019-20, states were paid Rs 1,65,302 crore compensation even though toal cess collection was at Rs 95,444 crore and this gap is expected to widen this year.

The Council may look at sin goods, like pan masala which attracts 100 per cent cess with an upper ceiling at 130 per cent, to bolster cess collection. Aerated drinks incur cess of 12 per cent with upper limit at 15 per cent, and the rate of cess on tobacco products is limited at Rs 4,170 per 1,000 sticks or 290 per cent ad valorem. This gives the Council enough window to levy additional cess in increments, which it may look at in the 42nd meeting as well.

At the Council’s 42nd meeting on September 19, there is a strong likelihood of discussions happening on issues like resolution of inverted duty structure, tax on pan masala and measures on ease of doing business, according to various reports.