GST Council meeting to see stormy session as opposing states to raise compensation issue

The Goods and Services Tax (GST) Council is all set to meet on Monday in what could be one of the most heated up sessions ever witnessed since the indirect tax reform replaced the old structure three years ago.

While 20 states have agreed to borrow and make up for the compensation cess shortfall, several states are ready to oppose the Centre’s proposal.

With the states staring at a staggering Rs 2.35 lakh crore Goods and Services Tax revenue shortfall, the Centre’s proposed borrowing solution for states has vertically split the GST Council.

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Sources said that the states opposed to the Centre’s proposal would object to the borrowing options and demand adopting an alternative mechanism to fund the deficit in GST collection during the 42nd GST Council meeting.

If they continue to object and raise demand for an alternate mechanism, the Council may be forced to take a vote on the issue — something the central government has avoided till now.

At the Centre of today’s meeting will be many non-BJP ruled states who have said no to the Centre’s proposals on the compensation issue. Against them will be 20 states, mostly ruled by BJP or parties which have accepted the government’s proposals.


The Centre’s calculation reveals that nearly Rs 97,000 crore out of the Rs 2.35 lakh crore GST shortfall is on account of implementation of GST, and the rest Rs 1.38 lakh crore is due to the pandemic and subsequent lockdown.

In August, the Centre offered two options to the states to tide over the crisis: They could either borrow Rs 97,000 crore from a special window facilitated by the RBI or the entire amount of Rs 2.35 lakh crore.

To pay back the borrowings, the Centre promised to extend the compensation mechanism beyond five years since it was launched in 2017. It may be noted that the compensation cess is levied on luxury, demerit and sin goods.

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During the last meeting of the GST Council, many states opposed to the Centre’s proposal wanted a guarantee from it that the compensation would be paid.

When the Centre refused to provide the warranty, chief ministers of states ruled by BJP’s political opponents – Delhi, Kerala, West Bengal, Telangana, Chhattisgarh and Tamil Nadu — wrote letters to the Centre opposing the options that were presented to them.

But more states have said yes than no.

By mid-September, at least 20 states have said yes to borrow Rs 97,000 crore in the current fiscal.

But six states maintained that as per the Constitutional amendment that resulted in GST replacing the old structure, the Centre is bound by the law to compensate the states.

The Centre, however, has dug in its heels saying that it is the states who have to borrow and make up for the shortfall as the revenue generated from compensation cess is “owned” by the states.

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The Centre had referred the matter to the Attorney General of India KK Venugopal. It is also working with CMs of BJP-ruled states and allies in case the issue comes to vote.

In the laid down voting procedure, the Centre has an advantage with 20 states already on board. A lot will depend on what stand states like Odisha and Andhra Pradesh take during today’s meeting as a drift towards the Opposition can upset the Centre’s plan.

As part of the plan laid out for the meeting of the Council on Monday, Bihar is expected to take the lead with Bihar Deputy Chief Minister Sushil Kumar Modi may press for the initiation of a special window for the states to borrow.

The Opposition, too, has a strategy. Leaders from Congress and Left-ruled states are believed to be trying to build support for their demand of a quick set up of a Dispute Resolution mechanism.

The GST Compensation payment to states erupted as a contentious issue after revenues from the imposition of cess plummeted since August 2019.

During April-July of the ongoing fiscal year, the total compensation dues to states were in excess Rs 1.51 lakh crore.

To pay off the states, the Centre had to pull out the excess cess amount collected during two fiscal years, 2017-18 and 2018-19. In the period 2019-20, the Centre disbursed over Rs 1.65 lakh crore as GST compensation.

In the same period, the cess collected was a paltry Rs 95,444 crore against the compensation payout of Rs 69,275 crore and Rs 41,146 crore 2018-19 and in 2017-18 respectively.

Also Read | A breakdown of trust

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