TMI BlogMinutes of the 41st GST Council Meeting held on 27th August, 2020X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. He, on behalf of the Council welcomed the following new Members nominated from the various States, Sh. Ajit Pawar, Hon ble Deputy Chief Minister of Maharashtra, Sh. Jagdish Devda, Hon ble Minister for Commercial Tax, Finance, Statistics and Planning from Madhya Pradesh and Sh.Subodh Uniyal, Hon ble Minister for Agriculture, Agricultural Marketing. Agricultural Processing, Agricultural Education, Garden and Fruit Industries, Silk Development from Uttarakhand. 3.1 The Secretary then briefed the Council that the only Agenda that day was discussion on the GST Compensation to the States and UT s. He then asked Sh. Ritvik Pandey, Joint Secretary, DoR to begin with the presentation. Agenda Item 1: GST Compensation to States/UT s 4. The Joint Secretary, DoR began with a presentation (attached as Annexure 3 ) stating that it was a small presentation to give the status on the Compensation released till then, the legal provisions, the interpretation of those legal provisions and thereafter a discussion on the options available with respect to GST compensation could be taken up. The JS, DoR stated that since the inception of GST i.e 1 st July 2017 GST compensation of around ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the CFI and that it should be met through the cess amount and if there was a shortfall the Council should sit and deliberate on how that shortfall should be met. The JS, DoR added that this was further discussed in the 8 th GST Council Meeting held on 3-4 January, 2017 in which even the borrowing option was discussed and the Hon ble Chairperson again had stressed that it was the GST Council that would need to deliberate on the ways available to meet such gap. JS, DoR stressed that the intent was always to have a dedicated stream of revenue in the form of cess for payment of compensation to the States/UT s on account of the loss of revenue due to implementation of GST. Further stating that this dedicated revenue stream had a good impact in 2017-18 and 2018-19 and because of the same the release of compensation to the States/UT s was never impacted due to competing demands on the CFI on account of various Centrally sponsored schemes or expenditure requirements of Government of India for internal security, defence requirement etc. 4.3 The JS, DoR stated that based on the discussions in the GST Council, when the Bill was presented in the Parliament similar issues were brought u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2020, the Hon ble Chairperson had mentioned that the entire issue of compensation will be discussed in a special meeting in the month of April, but due to the pandemic, meeting could not be held. He also reminded that the Chairperson had mentioned of taking legal opinion and release as much GST compensation to the States/UT s as was possible and that the entire issue would be examined. Accordingly, on the basis of directions given in the Meeting the opinion of the learned Ld. AGI was sought on the matter. The Secretary asked JS, DoR to present verbatim opinion of the Ld. AGI. 4.7 The JS, DoR presented the verbatim opinion of learned AG: a. Irrespective of what the situation goes, whether cess resources are adequate or not at any point of time, the entitlement of the States are very hard coded in the Act that cannot be changed, it is protected revenue minus actual revenue, every year. b. There is no express provision in the Compensation Act which puts a mandate on the Government of India to raise resources or to arrange resources for payment of compensation. c. GST Council has the power to raise resources, it is very clearly mentioned in the Act that GST Council has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sked whether compensation to States should be made part of the Constitution, Ministry of Finance stated that it was expected that there would be no loss of revenue, nonetheless the Centre assured to pay compensation for a specified period if there was such a loss. He emphasised that it was in this spirit that it finally got incorporated into the Constitutional Amendment Bill, 2014 which was later finally passed and was worded as follows Parliament shall, by law, on the recommendation of GST Council, provide for compensation to the States for loss of revenue arising out of implementation of GST for a period of five years . So, the question was that the Parliament had enacted a law as provided in the Constitution including stated recommendations of the GST Council. Thus, this would require us to look at the Minutes of the Council s Meetings. He reminded the Council of the elaborate discussions on the subject prior to enactment of the GST Compensation law. Many Members had invited attention that in case the compensation cess was insufficient to meet the of needs Central Government should provide for the deficit from its own funds. Some suggested that if the amounts available for comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and this could then be recouped by continuation of cess beyond 5 years. He stated that other decisions including possibility of market borrowing for payments of compensation were part of the Minutes of the 8 th Meeting and need not be incorporated in the law The Hon ble Minister from Punjab further added that the Council agreed to the above suggestion. Thus it was evident that the GST Compensation Act was not worded as per the additional decisions of the Council, but in view of the assurances given by the Secretary to the Council, not to insist on legal change, agreeing to accept the promise there is no ambiguity what so ever that Centre was responsible for payment of compensation and that in case of a shortage Centre will have to provide for shortfall including borrowing. If the Centre had no obligation to pay GST compensation then the question arises as to why the orders for release of compensation from time to time were being issued by the Central Government, why not the Council Secretarial. The Compensation Fund is reflected in the Union Budget as a receipt of the Central Government under Major Head 009.Summing up he said that he appreciated the view of the learned AG but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this exercise could lead to incremental revenues of around ten thousand to twenty thousand Crore per annum which again would not be sufficient to compensate the States. 4. The second option was borrowing from the market which he felt was the only option available which posed questions such as who would borrow, Central government will borrow or State Government would borrow and what could be the mode of repayment which had been answered to by the Hon ble Chairperson as recorded in the Minutes that the repayment could be made through collection of cess in the sixth year and further subsequent years. The Hon ble Deputy CM of Bihar submitted to the Chairperson that the only option left was market borrowing. He stated that it would be better if Central Government could borrow and compensate the States, but understanding the limitations of the Centre as the Centre already had ₹ 12 Lakh Crore of borrowing this Financial Year which meant that fiscal deficit was crossing 5.5%. The projected revenue shortfall assuming collections in FY 2020-21 to be 65% of 2019-20 would be around ₹ 3.65 lakh Crore. Even in case of 80% collection the shortfall would be around ₹ 2.73 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have to forego revenue which would otherwise have accrued to them had cess been merged with SGST after June 2022, so that would be a loss for the States but the States were willing to bear that loss. He further emphasised the immediate need of funds for the States and that whatever decision had to be taken should be linalised in this meeting itself. He urged the Council to consider his suggestions. 7. The Hon ble Minister from Tamil Nadu stated that the issue being discussed was the most important issue causing anxiety amongst all the State Governments. He noted that it was worrisome that in this fiscal for the period up to July 2020 Compensation claims of ₹ 12,258.94 Crore were pending for State of Tamil Nadu. He stated the importance that compensation payments held for the overall fiscal situation of the State need not be emphasised, moreover significance of the same had increased manifold due to the fiscal stress caused by Covid- 19 situation. He added that the Government of Tamil Nadu expected the Government of India to continue to honour its commitment and to protect revenue at 14% growth from base year. Any reneging from the promise will not only affect the confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Maharashtra extended greetings to all the Hon ble members of the Council and stated that the State had pending compensation claim of ₹ 22,534 Crore for the FY 2020-21 till July and going by this rate this was likely to go up to ₹ 1 lakh Crore by the end of two years. If this compensation was not made available timely, the State s finances would further deteriorate and hinder development works of the State. He emphasised that in times of COVID- 19 the State needed more resources to tide over the situation. He urged the Centre to borrow from the market as for States it was not possible to borrow owing to the fiscal limits, as also States would be unable to obtain the interest rates that Centre could obtain and this undue high rate would ultimately burden the final consumer in form of greater cess. If all States entered into market to take loan then interest rate will further shoot up and it will become more difficult to raise loans. Centre has made a mechanism in the form of cess to compensate the States that is to be paid up to five years till June 2022. This period should be increased further for levy of cess. Centre should, in the present situation make provision fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to compensate and disburse protected revenue with 14% growth, to the States, moreover now when some of the States were unable to pay salaries to the employees, in addition to managing the Covid situation which required additional funds. Apart from this, economic activities had to be started for which some concessions had to be given by the State Government. That being the situation he urged the Chairperson not to burden the States any further. Let the central government borrow the money and give it to states, already there was provision in the GST Act that after a period of five years whatever additional cess had been collected it could be retained. He further added that from past several months the lockdown had slowly eased and economy had been opened but still tourism had taken a big hit in their State much like Goa. He requested the Hon ble Chairperson to let Government of India take the responsibility. Two things have been quotes, one is the statement of Finance Secretary in the Standing committee on Finance. The Finance Secretary in the Standing Committee of Finance said that Government had no money at present to pay GST compensation to the States, this should not be have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons with regard to Parliament rejecting the amendment moved by Hon ble MP Sh. K. C. Venugopal, he reminded the Council that he had himself been an MP for more than 23 years and had great respect for the Parliament, but whatever deliberations that had taken place in the Council, the assurances made by the Hon ble chairperson of the Council and decisions taken in Council may not be in the knowledge of the Parliament, so taking umbrage in the argument may not be appropriate. Further he brought up the issue that every State was getting 41 % revenue share whereas Puducherry was getting only 26% whereas it was entitled to 41% and also Puducherry was not being duly compensated even in grants given by Government of India. He made a strong plea that the Hon ble chairperson should think of extending the period of compensation for ten years or go for a different financial model for the States for GST. There was shortfall of cess and we were going for market borrowing and that being the situation, considering this aspect a separate meeting could be called as to what should be the different financial model, different sharing model so that GST Council can definitely in its wisdom come to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cit in the cess funds then who shall borrow. He asked why the Government of India seemed to be backing out and putting it on the State Governments maybe at higher interest rate and standing sovereign guarantee. He recommended that the Government of India and the Parliament must come forward, must stand for the country, for the federal structure and ensure that they were there with the States in times of stress. The rights of the taxation have been taken away from the States and given to GST Council. He added that he was also not in agreement that GST Council should take initiative and opined that Parliament should take initiative as enshrined in the 101 st Constitutional Amendment Act. He humbly reminded the Chairperson that she was leading them in the Council and also representing the Government of India and in these times of hardship they should ask the Government of India to take these loans. He added that he had some other suggestions regarding other possible revenue sources which he would share in writing. 11. The Hon ble Deputy CM of Delhi noted that he has had the privilege of being associated with GST Council and before that in the empowered committee since 2015 when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of borrowings by the States he said that Delhi did not have the power to take loans and give guarantee. He again reiterated that Delhi was one State that did not have the power to take loans and take guarantee. He again stressed that the responsibility of meeting the shortfall was of the Central Government as was evident from the Minutes of the 7 th 8 th and 10 th GST Council Meeting and the assurances given by the Chairperson and Secretary therein as discussed by Hon ble Minister from Punjab. He added that he had been very vocally advocating federal structure like the GST Council in sectors of education and health where State and Centre could work together and that if a decision was taken that it is the State s responsibility and that the States should borrow to make good the shortfall then this would be the last time that States would ever trust assurances by the Centre. He stated that the assurances given in the meeting and the intent of the Council in bringing out the GST framework were more important than what was written in the law. He emphasised that the intent of entire journey of bringing in the new tax regime should be seen and not what was written in the law or w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He drew the attention of the Council towards Goa and noted that Goa was heavily dependent on mining which the Hon ble Supreme Court prohibited, Further, he added that Goa was also heavily dependent on tourism which had been demolished by the pandemic which raised questions on Goa s economic survival. He stated that similar were the problems of other States, but small states get impacted by small amounts, noting that total dues to Goa were less than ₹ 1000 Crore. He stated that Compensation Cess Fund currently had a balance of ₹ 11000 Crore and if his counterparts from bigger States could have a larger heart, smaller States could be given their dues in time allowing them to survive and be saved from financial collapse. Smaller States such as Goa had a very small tax base and no new commodities or activities could be taxed to generate revenue. My learned friends in the Council had been privy and part of the formulation of the entire GST structure, He found it appalling that 7 th ,8 th and 10 th GST Council Meetings were being quoted, though they had a roadmap mentioned in these very Minutes that if there was a shortfall in the revenue, GST Council will take a call, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... times on how the revenue could be increased, how greater cess could be collected and possibly later rates could also be increased so that States don t suffer and the Centre would have sufficient revenue. It is not as though the Centre had plenty of funds which they were reluctant to release to the States. The quantum of stimulus provided by Centre in all sectors including Housing where tax rate is only 5% and for affordable housing only 1%. These were all positive steps. He stated that India had always been resilient and under the leadership of dynamic PM they would tide through these times and India will be the most prosperous country and that economy would rise again. He added that he had carefully listened to and appreciated the application of mind exhibited by the Hon ble Chairperson in the recent CII meeting and he was confident that the economy will make a strong comeback. Stating on behalf of the smaller States he again requested the Hon ble Chairperson to look into problem of smaller States. He compared the Centre to a father figure and the smaller states as little children crying for little things and sometimes the father lets the smaller child eat first and lets the elder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... past, they continue to trust now and will continue to trust in the future as well. They should not be any issue in giving the protected revenue of 14%. He stated that the issue with Jharkhand is that they are a manufacturing State. They get less revenues in the GST regime. Consuming States will get more revenues as was stated by Hon ble Member from Puducherry. He was right when he said that manufacturing States have a loss in GST. Their collections are low. There is a necessity of focusing on this issue. COVID-19 times have brought social and health related responsibilities. There is a dire need for money and their collections are also falling. Since the Chairperson is also the Finance Minister for the Government of India, he felt that it was necessary to convey that the Central Government has lot of pressure on the resources of the State. For example, 24% of the all coal mining in the country is done in Jharkhand. The production is done within the State but the revenues accrue to the Government of India. Fifty thousand acres of the State Government s land was lost but they did not get anything in return. Hon ble Coal Minister visited Jharkhand and sanctioned only ₹ 250 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GST Council which can decide and propose to Government of India that at least the tax slabs should be reviewed. If the 5% tax slab is changed to 6% tax slab, then according to him there wouldn t be a huge variation in the rate but the tax collection will increase. 5% tax slab had the largest basket. If the 12% slab was increased to 14% or 15% and 28% was increased to 30%, then at least the gap which was created over the last three years will be filled. He felt that for the coming meeting on 19th September, Central Government could deliberate and the States also should propose on how to get additional collections since Cess couldn t be the only way to get tax. If ₹ 90,000 crore would be the cess collection, then the Central Government cannot fill the gap for the States. There have to be alternative ways which have to be worked out by the GST Council. He thought that all the members will agree. He made another request that Vidhan Sabhas are being conducted physically, Parliament session will be attended physically and so, next meeting of the GST Council may be physically conducted at Vigyan Bhawan. This is better since each and every State would be present in the meeting and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded cannot be told now. Nobody was able to tell clearly when the COVID issue will subside, quantum of losses etc. In these circumstances, they suggest that the cess period should be increased till the repayment is over. Total period is for five years, so there are about 20 more months to go. How much compensation will be paid, when the COVID situation will improve, when exactly the revenues would increase nobody can tel1 So, it is better that Central Government should take the responsibility and it should pay the compensation as quickly as possible to the States so that States can work better in health sector and other sectors during the CO VID pandemic times. They were not able to pay the employee salaries for three months and they have to pay their employees. Their situation is very bad. His plea is that Central Government should take all the responsibility and they should take the loan. It will be easier for the Central Government to take the loan rather than the States since individual States will get loans at different rates. What rate of interest should be applied for repayment, how many months should be the loan tenure etc. complications can be avoided. The request from Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliberations that took place over more than a decade ago, the spirit of the entire enactment which was mentioned by Hon ble member from Punjab and other Members, in the 7 th GST Council Meeting, he reiterated that The Hon ble chairperson observed that there was constitutional commitment for the Central Government to provide hundred per cent compensation and how it would be done was for the Council to decide . In another instance the minutes of the 7 th GST Council Meeting state that The Hon ble Chairperson said that in the Council there was shared sovereignty between the Centre and the States and the council was the de facto legislative body and it was expected that the Parliament and the State legislators would adopt the decision of the Council in toto . Hon ble Member from Punjab had earlier stated and he repeated that in the 8 th GST Council Meeting, while perusing the draft of the Compensation Act it was approved that Section 10(2) (crediting proceeds of cess to GST Compensation Fund): To modify this sub section to clearly reflect that compensation shall be paid bi -monthly and that it shall be paid within 5 years, and in case the amount in the GST Compensation Fund is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the RBI to raise the money so that they tide over the crisis. On the whole, they truly opine that the because of various sizes of States, various revenue patterns and various specific nature and financial situations, they feel that Centre has to somehow hand hold the States and take them forward by providing all the compensation they have to receive and even more, if possible. It becomes very difficult for smaller and medium States to repay at later stage because of amount of borrowing. 16. Hon ble Member from Assam thanked the Chairperson for convening this important meeting. He had mentioned his thoughts on this issue in the previous meeting also. Some of his esteemed colleagues had taken a stand that it was for the Central Government to pay compensation if it was not legal responsibility, at least it was a moral responsibility. The provision of the Constitution was very clear that compensation will be provided for GST implementation. Nowhere is it mentioned that if State and Central Government suffer revenue loss for certain other reasons not because of GST, he thought that Central Government was neither morally nor legally responsible to pay compensation to the States. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed certain provision, for Kerala to raise revenue and under the Constitution they had been given a prescription to raise revenue. There was no morality involved at that point of time which was done by the Constitution. He admitted that the Central Government has taken good care of States during the pandemic and if someone used harsh words, he was very sorry for that. The Central Government had arranged Revenue Deficit Grant and Devolution Grant. They could have taken a moral and legal stance that Income Tax, Excise Collections were low and hence grants may not be given. The moral question would have been flattened. The Central Government was looking after the States like a mother looked after her child during crisis. The Chairperson was playing the exact same role. He stated that in spite of revenue loss, he would require about ₹ 2,148 crore but he would not use a single harsh word or put moral, legal responsibility on the Centre. Going by the conduct of the Chairperson in March, he was convinced that the special meeting was convened to help the States knowing that it was neither the moral responsibility nor legal responsibility to pay for the loss due to COVID-19. He stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are doing that. Even after the Revenue Deficit grant was finished, she again reappropriated and started paying to States. These things history will record. Some people were trying to project as if the States were not being looked after by Centre but history and records will say otherwise that Centre has gone out of way to help the States in this crisis. Clearly, there were two losses, one on account of GST implementation and other on account of COVID- 19 pandemic. He requested that for GST implementation loss, the Central Government can borrow and the GST council will pay back to Central Government or RBI from the cess that will be collected even after five years or at the enhanced rates whenever they are in a position to raise the rates. On the COVID- 19 related loss, the States imposed lockdown and managing the State was their responsibility fully knowing that there will be loss. On that count, his humble suggestion was that certain fiscal space and borrowing limit may be given and if they felt the need to borrow, they will otherwise they will not. He would not be one among those who would hold the Central Government morally and legally responsible for COVID-19 loss. 17. Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s opinion. He did not want to state what learned AG had said but he would fully agree with Dy. CM, Bihar that there was only one option at the current juncture, for reasons he had elaborated that, borrowing was the only solution. Now, what would be the agency to do this borrowing? There are three agencies, Central Government, State Government and the GST Council itself. The initial presentation by the Revenue Secretary seemed to have hinted that the it would be more appropriate for the States to borrow. Hon ble Member from Andhra Pradesh had elaborated the difficulties involved. One is the FRBM Act, the other is that the cost of borrowing would be much higher, and the third is that there is no particular macroeconomic merit in making States to borrow. As far as fiscal deficit is concerned, when the Centre borrows, Centre s fiscal deficit goes up and when the State borrows, State s fiscal deficit goes up. But for any macroeconomic analysis or for rating agencies optics, the combined fiscal deficit of States and Centre is relevant. So, it did not matter whether it was Centre or State. Borrowing by the Centre had certain advantages which were already elaborated by many Members and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed on the option of raising loan. He agreed with the suggestion of Dy.CM, Bihar that the States would be in a position to take a loan on account of GST compensation only if loan burden in any form did not fall on them. Himachal Pradesh is a unique State and this had to be kept in mind when making any kind of decision. It was his hope that if there was a necessity for the State to take a loan on account of GST compensation then in the current circumstances there should not be any negative effect on the borrowing limit of State. The revenue gap of the State was steadily increasing while the return compliance of the State was better than the national average. In the end, he also wanted to state that the even after borrowing limit of the State was increased from 3% to 5% of GSDP, still there was revenue gap of about ₹ 4,500 crore. If a loan had to be raised to fund the compensation cess they looked forward to cooperation from Central Government. He agreed with few suggestions from States like raising the rate of compensation cess and rationalizing the GST rates. He requested the Hon ble Union Finance Minister that while making a decision, the unique circumstances of Himachal Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt from taking the letter and spirit of constitution, the market spirit should also be considered. Therefore, putting the economic wagon back on the rail is of the highest priority of the States and Centre. To put the economy on track finances, investment, capital expenditure without gaps are required for Centre and States. Decisions of any kind which reduce the capital expenditure of the States will certainly harm not only the States but also Centre. He emphasized that this was a testing time and it was not only the monetary aspect to be considered but the very foundation of the federal structure. The cooperative federalism which was proposed and propagated by Hon ble Prime Minister has to be taken forward. He felt that they have to come out with a solution in the current meeting or next meeting itself without wasting time. Having said this, he stated that the position of law was well known which he did not want to repeat. The law provides that what should be done in these circumstances. One of the solutions which had been deliberated in the 8 th GST Council Meeting, which was the sum and substance of the entire discussion, is that the then Chairman mentioned in case the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as Karnataka was concerned, since they are almost growing at 14% (targeting 13.9%) efficiency should not be punished. If not rewarded it should not be punished. Therefore, looking into all these views and increase of borrowing limits since they had come out with certain reforms, it might take some time; SBI in its reports had said the day before the previous day that only eight States were capable of borrowing and other States find it difficult to borrow. This aspect also had to be relooked into so that State Finances must be reserved. He thought that with the Chairperson at the helm of affairs who had been one of the experienced persons in handling finances as well as she had been advocating the States cause for a lot of time, he felt that under the leadership of the Chairperson, Statesman like decision had to be taken by the GST Council. That means that almost three fourth of the responsibilities of the States. They had to strive to increase the revenues, they had to contribute to Central pool which was their duty. At the same time, the compensation issue should not be withered away between the Centre and State. That s why careful balance is also necessary. He once again ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to only think about how to get out of this situation with the help of Government of India. He requested that they all should think on the simplest and fastest way to meet the compensation needs and the liquidity needs of the States. Just as Dy.CM, Bihar stated that there was only one option. When they earlier discussed about the compensation issue, the Corona pandemic was not present. At that time, there were balance dues of compensation of States. At that time their thoughts were expressed and were also recorded in the minutes that, if possible, Government of India or GST Council would take a loan and pay the respective amounts to the States and the create mechanism for repayment through cess collections. Till the repayment was done, the burden of interest should not fall on the States. He made this suggestion when corona was not present. The situation had worsened now and payment of around ₹ 3 lakh crore demand of States was required. As the presentation stated, ₹ 12 lakh crore would be arranged by loan by the Government of India, it was the responsibility of the Centre to think about how to raise loan for this issue. Gujarat was to be paid a compensation of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers from States may be constituted urgently and they should submit a report on how to raise a loan, how to implement this mechanism, who will take the loan, when the payments will be made etc. within seven to ten days. It was necessary that payments were made as early as possible. If there were delays then the troubles of States would multiply. States were not in a position to pay salaries also. Plans and development activities in States had stopped. These had to be taken forward and Atma Nirbhar Bharat also had to be implemented by them. To do these, financial situation of the States had to be strengthened. A committee of officers as mentioned above may be constituted with inputs from the States and a mechanism/formula may be created. The States should express their thoughts on the proposed formula then the path will become easy. The decision on implementation of this cannot be taken by video conference but if the committee gave the suggestion and the States gave their suggestions on it then the implementation would be easy. 21. Hon ble Member from West Bengal submitted that the empowered committee had met in Kolkata where the question was of Section 18 of 101 st Constitutiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e question. Capacity to borrow is one of the usual criteria for borrowing. Capacity to borrow of the States is in a precarious condition. Hon ble Member from Karnataka cited the SBI report that only eight States were in a state to borrow. The fact is that nobody is in a state where they can borrow and build up debt which they have to service. So, his first point is that capacity to borrow lies with the Centre. The Centre had already given Rs ten lakh crore stimulus. It would probably be Rs twelve or thirteen Iakh crore in reality of which the RBI is perhaps a 70-80% partner. The Centre can monetize its fiscal deficit but the States cannot. The States cannot monetize their fiscal deficit and ask for money. The Centre can do it, essentially it means to print money. Capacity to borrow is a critical point and his humble submission was that the Centre becomes the eligible entity because of their capacity to borrow. Second point he made was the rate of borrowing. Today the States did not have capacity which was said by eleven-twelve States and others agreed. The Centre borrows at 1.5 to 2% less than the States. Hon ble Member from Telangana stated that every State will have its own borro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrows since it will be counted as fiscal deficit and it will affect the rating agencies, he earnestly submitted that since Centre had the capacity to borrow, can borrow at right rate and had the debt servicing capacity this may be considered objectively. With it, the Chairperson can put in place a long-term strategy with the GST Council that they will rejig the rates especially the cesses and particularly the sin goods. Those could be in the long run when the economy had recovered. Some more headroom would be obtained. Then of course, they would bring in reforms without much revenue loss. If done today, the revenue would fall due to elasticity of demand. The present elasticity of demand says if the rates are increased, the revenue will shrink because of the current condition of the economy. He concluded humbly that the Centre may take this on and do what had been done for the stimulating the economy, though it had not been cash which was his earnest submission, 70-80% was taken by RBI as partner and 20% may be taken by Centre with 1-2% of fiscal outgo. The RBI helped in loans. He requested for the RBI to be brought in. He had seen in the news that RBI had done only 44% of total pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess period for five more years. Due to COVID, the income of all States had fallen and nobody could predict till when this situation will be present and when things will be back to normal. For this reason, the cess period should be extended. With a federal structure mechanism, for the States, the Central Government may also raise funds by raising loans from IMF, World Bank and other institutions and pay compensation to the States. The responsibility to pay compensation is with the Central Government. Due to COVID, the expenses of the State had increased. This is a global pandemic. The Central Government had to bear the expenses of this pandemic. Due to COVID, their expenses have increased and revenues had fallen. Therefore, their legitimate demand for compensation, which the Government had promised in accordance with Constitution should be definitely met. Along with this, he also wanted to draw attention to the fact that changes were brought in the Centrally Sponsored Schemes. Taking the example of Rajasthan, he stated that, before 2013, the Central Government used to give 90% grant for drinking water schemes but after 2013, the Central Government had changed the ratio to 50:50. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount for the next two years, then they would get a figure of ₹ 60,000 crore. In the exclusive meeting on GST compensation, there were two options before them. First was that their resources and other means may be increased and the second is that, to deal with the current circumstances, borrowings may be resorted to and take a loan in some form. He wanted to attract attention to the fact that during the lockdown period premium segment video on demand service aggregators like Netflix, Amazon Prime, Hotstar, Zee Five had grown faster and the effect of this on the GST revenues from cinema halls and multiplex is natural. The tax slab for these should be increased from 18% to 28% and based on viewership bringing these under the ambit of compensation cess may be considered.. Apart from this, cess also should be imposed on horse racing, gambling, it also had to be deliberated that from 15th November 2017, 178 items were moved from 28% slab to 18%. In first phase GST rates should be increased from 18% to 20% on items used by high income group by which the revenues of Centre and States will increase and the requirement of compensation will decrease. The problem which they had in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn on Facebook, YouTube, Google is negligible. If a mechanism was devised to share data then their revenues could increase. Finance Secretary at the beginning had focussed on how to deal with the current situation and Hon ble Member from Gujarat stated that borrowing had to be done, whether the Centre, GST Council or the States. In this matter, they are completely with the GST Council and Central Government in case they take a decision for reforms. Hon ble Member from Gujarat stated that committee may be formed and in five to ten days they deliberate on all the issues and options. Thoughts were expressed on what the situation will be if the Central Government borrows and if the State Government borrows. Their issues like rate of interest, FRBM limits, conditions for loans and other issues of the State Government are known to the Chairperson. If such a committee is formed, then Uttar Pradesh should be given representation in it. This committee should deliberate on all issues and should submit its report in a maximum of ten days so that it would be easy for the Chairperson to decide. The spirit of announcement of compensation was that compensation was a grant which would be available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of ₹ 71,500 crore. There were not in a position to borrow further. His humble request was that it was preferable for the Centre to take the loan and pay to the States. 26. Hon ble Member from Madhya Pradesh stated that during the Corona times, due to economic slowdown State tax revenues fell by 40%. From April to July 2020, including the dues from earlier period, Madhya Pradesh was yet to receive compensation of ₹ 6,000 crore. His request was that this may be paid immediately and they received a compensation of ₹ 2,600 in the current year for which he thanked the Chairperson. Hon ble Member from Gujarat spoke on many issues and he agreed with him. Other Hon ble Members have spoken quite extensively as well and he would not speak much further. He requested that the compensation may be paid immediately. 27. Finance Secretary stated that an estimate was made regarding the shortfall in compensation, taking into account the SGST, CGST, IGST collections in last four months and the trend of how the economy is picking up. He further stated that as the Union Finance Secretary, the aspects of Union s revenue sources and further devolution to the States also needed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere would be recovery in the coming few months, estimates suggest that there would be a shortfall of around ₹ 3,00,000 crore for the year against the protected revenue. For April-July, the shortfall is around ₹ 1,50,000 Crore. Shortfall has been divided into how much of is it because of Covid, and how much is the shortfall even if Covid was not there. If Covid was not there, around 10% growth rate would have been registered in post settlement SGST revenue over 2019-20. The gap between protected revenue and revenue of 2020-21 as estimated in the above manner, would have been the gap even if Covid was not there. The rest of the gap is because of Covid. For the estimation, only revenues from April till January are taken as the compensation for February and March becomes payable in the next Financial Year, as is the case every year. The protected Revenue for the period from April to January would be ₹ 6,38,339 Crore. Post settlement SGST collection during the same period last year was ₹ 4,30,147 Crore. Therefore, it is estimated that, with 10% increase, if Covid had not been there, collection would have been ₹ 4,73,161 Crore. Thus, a shortfall of ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en implementation of GST and other reasons is inherent in the Constitution and not technical in nature. He further stated as per Section 18 of the 101 st Constitution Amendment Act, Parliament shall, by law, on the recommendation of Goods and Services Tax Council provide for compensation to the States for loss of revenue arising on account of implementation of Goods and Service Tax for a period of five years. Thus, distinction is inherent. GST implementation loss should be met from Compensation kitty, but to say that it is the moral responsibility of the Centre to compensate for any loss accrued because of Covid-19 also, is not a proper inference of the Act. Supposing if any State faces flood situation in future, it cannot be suggested that Centre should compensate for the loss of revenue in such situation also. He further stated that though he was not opposed to Centre supporting the States, it could only be done for the loss arising out of implementation of GST. Regarding Covid situation, it can only be requested to the Centre to help the States which Centre is any way doing, but not as responsibility of the Centre. 31. Hon ble Member from Puducherry stated that the distincti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ST amount which was wrongly credited to the Consolidated Fund of India. He further stated that an entry of about ₹ 34,000 Crore was reversed, but a clarification was needed about the rest of the money. If the rest of the amount ₹ 54,000 Crore was also reversed, it would help ease the compensation shortfall situation. He further stated that he would hate to see the day when the States feel pressurized by citizens to breach the spirit of GST just because basic commitments not being met, as hungry stomach knows no law. Compensation was supposed tobe an exception and it was thought that by 2022, most of the States would not need compensation. He requested that the Centre may persuade the XV Finance Commission to make revenue deficit grants to the States which have large deficit. Punjab was looking at the deficit of almost 65% by 2022 because the State had been uniquely disturbed by GST as 25% of the State s revenue was subsumed on account of not being able to tax food grains under GST. Post-2022, when there is no assured compensation, Punjab would be in a precarious situation. 35. Hon ble Member from Goa stated that there has to be a distinction between the loss arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan. He further stated that even if the States take loan at different interest rates, according to the Section 10 (1) of the GST (Compensation to States) Act, all amounts need to be credited to the Public Account of India, and need to be redistributed among the States which makes it a difficult and complex proposition. He stated that Centre should instead take the loan, and it could be paid back from the Cess collections in subsequent years. 37. Hon ble Member from Bihar stated that in the last three years, the shortfall was never divided into arising from economic slowdown, or from any disaster and that any shortfall was compensated. He stated that while it was good to understand this distinction, it may not be the proper time for this as the States require money at present. He stated that the basic questions at hand were to decide who should borrow and how to borrow. He further stated that because of the distinction, the amount of compensation to be released to the States stands reduced and while it is good to understand, it may not be the appropriate time for this differentiation. He stated that whatever be the loss, it should be compensated, from borrowing by either the Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s package but are asking to maintain the existing expenditure. He suggested that the interest rate at present was one of the lowest and borrowing will not have much impact. He suggested that a part of the Centre borrowing may be monetized instead, to not affect the interest rate. He stated that during the preliminary discussion, all the Hon ble Members except one or two Hon ble Members expressed their opinion that States are in need of compensation because of the current situation. He stated that proposal should be put forward that embodies the spirit of the discussion in the Council meeting. He stated that if the Centre proceeds with the present line, it may lead to a dispute between the Centre and the States. He further stated that the plea was not to expand the expenditure and create panic in the economy, but instead, to allow the States to maintain the present level of expenditure. 41. Hon ble Member from Assam stated that the presentation of the Finance Secretary regarding the impact of combined borrowing on the economy must be taken in the right spirit. He stated that the Centre and the States are bound to act by the Constitution which states that the compensation may be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a further period. 44. Hon ble Member from Karnataka stated that the law was very clear and he agreed with the perspective shared by the Finance Secretary regarding the identification of actual shortfall from Covid and non-Covid reasons. He further stated that he shared the views of the Hon ble Members from Assam and Goa that the losses should be understood in a comprehensive way and that there is nothing wrong in projecting the revenue loss regarding shortfall due to implementation of GST, and due to Covid situation. He further stated that since all the States need compensation, the debt load of the shortfall may be eased by spacing out of the Compensation to one or two years beyond the prescribed transition period. He further stated the both the Centre and the States must together face the situation. 45. Hon ble Member from West Bengal that the ultimate crux of the discussion was to decide whether the Centre or the States or the GST Council would borrow with a sovereign guarantee from the Centre. He stated that the borrowing by GST Council with a guarantee from the Centre would be the same as borrowing by the Centre and further borrowing by GST Council may attract higher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that regarding the issue of IGST settlement, the issue was resolved but the mechanism of adjustment among the States is being examined by the Group of Ministers headed by the Hon ble Member from Bihar which the GoM would be able to do after submission of the report by the Department of Revenue officials. She stated that the approach had been to resolve the issues as early as possible, not to keep any issue pending. She stated that any question of mistrust is not warranted in the Council as efforts were always made to clear the long pending dues of the States at the earliest. She further stated that it was understood that the Centre and the States borrowing are added to arrive at the Debt-to-GDP ratio and it was suggested not to worry about the fiscal deficit and expand expenditure by the Government. She pointed out that this was the principle behind Aatma Nirbhar Bharat package whether it is through RBI or Ministry of Finance, or investing in the National Infrastructure pipeline. She mentioned that the spending shall continue through the year. She then presented the proposal before the Council as Option 1 which is derived from the discussion earlier. She mentioned that she was in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted collection would be around ₹ 90,000 Crore requiring around ₹ 2,40,000 Crore to be borrowed. She suggested that the arrangements may be done only for the current year and review the compensation situation next year after considering the revival of the economy. She stated that for both the options, the repayment would have to be done from the Cess collections from the extended period beyond the transition period. 48. Hon ble Member from West Bengal stated that Option 2 for a limited period of the present year where the Centre borrows Rs, 2,30,000 Crore to be repaid from the Cess collections from extended period would be agreeable to him. 49. Hon ble Chairperson clarified that the Centre would only facilitate the borrowing through the RBI but the borrowing would be in the name of the States as the Centre already had borrowings upsetting the FRBM. 50. Hon ble Member from West Bengal stated that it was his understanding that the States would not be burdened with debt or with the interest payment requirements. 51. Hon ble Chairperson clarified that States would not burdened with repayment of debt as the borrowed amount would be paid back with the collections f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Member from West Bengal supported the proposal made by the Hon ble Minister from Assam and suggested that a detailed proposal may be sent by the Finance Secretary to allow the States to consider the options as it is difficult to ascertain the effect of borrowing on the States debt burden. He requested for time of seven working days to come back with reply and State s submissions and refinements if any. 63. Hon ble Chairperson stated that a Note detailing both the options would be sent to all the States and within seven working days, States may communicate their decision. 64. Hon ble Member from Delhi stated that Delhi is not entitled to take a loan under the present legal position and the Centre needs to take the loan on behalf of Delhi. 65. Hon ble Chairperson stated that the States may communicate their option within seven working days after sending the note. 66. The meeting ended with the Finance Secretary thanking the Chairperson, Chief Minister, Deputy Chief Ministers, Finance Ministers of the States, officers from the Government of India and officers who helped in organizing the meeting. - Circular - Trade Notice - Public Notice - Instructions - Office ..... X X X X Extracts X X X X X X X X Extracts X X X X
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