Key Outcomes of the 41st GST Council Meeting

The 41st Goods and Services Tax (GST) Council convened virtually on August 27, 2020, with Union Finance Minister Nirmala Sitharaman presiding. This session focused on a singular agenda item. Earlier, during the June 12, 2020, GST Council meeting, the Finance Minister had indicated a July 2020 meeting to discuss compensation cess, though the specific date remained unconfirmed until then.

On May 28, 2021, the 43rd GST Council meeting, also chaired by Union FM Nirmala Sitharaman via video conference, concluded. During this session, the Council approved the reintroduction of the GST amnesty scheme, rationalized late fees for all taxpayers, especially small ones, and exempted IGST on the import of COVID-19 treatment equipment and relief materials until August 31, 2021. For more details, refer to the 43rd GST Council meeting update.

Highlights of 41st GST Council Meet

The 41st GST Council session, held on August 27, 2020, through video conferencing and chaired by Union FM Nirmala Sitharaman, centered on a single agenda: resolving state compensation methods. The Finance Secretary informed the media that the total shortfall for FY 2020-21 amounted to Rs 2,35,000 crore. Of this, Rs 97,000 crore was attributed to GST implementation, while the remainder was considered an "act of God" due to COVID-19. States were presented with two options to address the compensation cess deficit.

• Option 1: The central government could facilitate Rs 97,000 crore in borrowings for states through a special Reserve Bank of India (RBI) window. This amount would be repayable after five years from cess collection, with a reasonable interest rate.
• Option 2: States could directly borrow the entire Rs 2,35,000 crore from the RBI.

States were given seven working days to evaluate these options before a subsequent GST Council meeting would finalize the decision.

Further clarifications were provided by the Union FM during a press conference, as follows:

• The centre would offer an additional 0.5% relaxation on states' borrowing limits under the FRBM Act for Rs 2.03 lakh crore, as previously announced in May 2020 during an Aatmanirbhar Bharat press conference. This measure would enable states to borrow more based on the severity of the COVID-19 impact.
• Both options had distinct advantages and disadvantages. Option 1 offered continued compensation cess eligibility for subsequent years with central support, while Option 2 involved a larger immediate borrowing amount to be repaid from future cess collections during the transition period.
• This arrangement was solely for FY 2020-21. The GST Council would reassess the situation in April 2021 to decide on the fifth year's compensation.
• States could secure loans at G-security linked interest rates without complications.
• Upon Council approval, the centre would work with the RBI to clear dues and manage finances for the remainder of the fiscal year.
• States needed to base their decision on anticipated compensation cess collections in future periods.

News and Updates on 41st GST Council Meet

• The GST Council meeting concluded, and the Finance Secretary addressed the media at 4:30 p.m.
• Sources reported Union FM Nirmala Sitharaman was concluding the meeting, reaffirming the commitment to compensation payments. A press briefing was expected shortly.
• The press briefing, initially set for 3:00 p.m., was postponed as the GST Council meeting continued.
• Sources indicated ongoing disagreements between the central government and opposition states regarding market borrowing during the GST Council meeting.
• Goa reportedly proposed that the centre prioritize urgent payments to smaller states, deferring payments for larger states.
• Breaking news sources suggested states might advocate for the compensation cess to extend for ten years.
• Bihar Deputy CM, Shri Sushil Modi, proposed states borrow to cover the shortfall, a suggestion opposed by states like Delhi, Kerala, and Punjab.
• Union Finance Minister Smt. Nirmala Sitharaman was scheduled to hold a virtual media briefing at 3:00 p.m. to announce the outcomes of the 41st GST Council meeting.
• Sources indicated the Council meeting would also address potential GST rate reductions for the two-wheeler sector.
• The 41st GST Council meeting was chaired by Finance Minister Smt. Nirmala Sitharaman via video conferencing, with MOS Shri Anurag Thakur, State and UT Finance Ministers, and senior officials also present.
• Sources suggested that while the central government is expected to compensate states for at least five years, the law does not specify this obligation in force majeure events like COVID-19.
• The GST Council meeting commenced at 11:00 a.m. today.

Expectations from 41st GST Council Meet

Compensation of GST revenue to states through borrowing

A current deficit existed in compensation cess collections, insufficient to meet the promised revenue share for states. The cess, levied on specific sin and luxury goods in addition to GST, guaranteed states a five-year compensation with a 14% annual increase, currently extended until 2022. The Council planned to discuss methods to cover this shortfall.

Several funding options were considered by the GST Council to address the revenue distribution deficit, including market borrowings, expanding the range of items subject to compensation cess, or adjusting GST rates. For instance, increasing compensation cess on tobacco products such as bidis and cigarettes could generate an estimated Rs 49,470 crore.

The Attorney General of India, whose opinion the Central Government sought, recommended state borrowings with a central guarantee to finance the deficit, stating that the centre was not obligated to provide compensation directly. Market borrowings could be permitted based on future receipts from the compensation fund.

Consequently, the Council was anticipated to favor market borrowings. However, states preferred to include more items under the compensation cess framework. The meeting was also expected to assess the central and state governments' respective shares in the revenue loss.

Reviewing the preparedness of the e-invoicing system

The GST Council was also likely to receive an update on GSTN's readiness to implement the e-invoicing system, scheduled to begin on October 1, 2020.

The next GST Council meeting was tentatively scheduled for September 19, 2020, to address other matters such as solutions for inverted tax structure issues and certain rate rationalizations.