Summary of the 42nd GST Council Meeting: Key Decisions and Recent Developments

The 42nd Goods and Services Tax (GST) Council convened on two occasions in 2020: October 5th and October 12th. These important sessions were led by Finance Minister Smt. Nirmala Sitharaman. Union Minister of State for Finance and Corporate Affairs, Shri Anurag Thakur, also participated, alongside Finance Ministers from various states and union territories (UTs), and other senior officials representing both the Ministry of Finance and state/UT administrations.

During the initial meeting on October 5th, following extensive discussions lasting nearly eight hours, the Council could not reach a unanimous agreement regarding the borrowing mechanism to address the compensation cess deficit. Consequently, a follow-up meeting was scheduled for October 12th, 2020, to further deliberate on and resolve the compensation issues impacting states.

Recent Updates

28th May 2021

The 43rd GST Council meeting was held virtually on May 28th, 2021, chaired by Union FM Nirmala Sitharaman. Key recommendations included the reintroduction of the GST amnesty scheme, rationalization of late fees, and a nil IGST rate for importing COVID-19 related equipment, irrespective of whether it was received free of cost.

Highlights from the 42nd GST Council Meeting (October 12, 2020)

1. The 42nd GST Council meeting concluded without a consensus on the borrowing matter, leaving the issue unresolved. States retained the option to proceed with borrowing funds according to previously presented choices.
2. The application of the compensation cess will extend beyond the initial five-year period, a decision announced during the 42nd GST Council meeting.
3. The central government indicated it would not borrow funds to cover the compensation cess shortfall, as such a move could increase the yield on Government securities (G-Sec bonds).
4. The Finance Minister elaborated that exceeding the Centre's established borrowing calendar to acquire funds would drive up G-Sec bond yields, which serve as a benchmark for all other borrowing activities. This would subsequently raise borrowing costs for both states and the private sector.
5. It was also clarified in the press briefing that the cess collected from July 2022 onwards would not be distributed to states. Instead, these funds would be exclusively used for repaying the interest and principal of the borrowings made, thereby ensuring states bear no repayment burden.

Highlights from the 42nd GST Council Meeting (October 5, 2020)

During the GST Council meeting on October 5th, discussions focused on the critical compensation cess challenge, alongside measures aimed at simplifying return filing and potential GST rate reductions. Below are the key outcomes from this session:

1. Quarterly Filing for Small Taxpayers: Effective January 1st, 2021, small taxpayers with an annual turnover below Rs 5 crore gained the option to file quarterly GSTR-3B and GSTR-1 returns. The deadline for submitting quarterly GSTR-1 will be the 13th day of the month following the quarter, starting from January 1st, 2021. However, taxpayers can still upload invoices monthly. This initiative reduces the number of required returns from 24 to 8 annually.
2. Advance Tax Payment Option: For the first two months of a quarter, these quarterly taxpayers have the choice to pay 35% of their previous quarter's net cash tax liability using an automatically generated challan.
3. Automated GSTR-3B Generation: A plan was developed for the automatic generation of GSTR-3B forms. Input Tax Credit (ITC) will be pre-filled from the supplier’s GSTR-1, and tax liability will be pre-filled from the business’s own GSTR-1. To facilitate this, GSTR-1 filing will become mandatory before GSTR-3B filing, effective April 1st, 2021.
4. Monthly GST Payments: All taxpayers will continue to remit monthly GST dues through a straightforward challan. The filing of a nil CMP-08 form will be permitted via SMS.
5. HSN Code Mandate: Effective April 1st, 2021, taxpayers with a turnover exceeding Rs 5 crore must specify Harmonized System of Nomenclature (HSN) codes up to 6 digits. For those with turnover below Rs 5 crore, 4-digit HSN codes are required for Business-to-Business (B2B) supplies of both goods and services. For specific notified categories of goods and services, 8-digit HSN codes will be necessary.
6. Aadhaar-Linked Refunds: Refunds will now be credited to bank accounts linked with both PAN and Aadhaar. An Aadhaar authentication facility (using OTP) is now available for refund applications, designed to prevent system misuse by taxpayers.
7. GST Exemption for Satellite Launch Services: GST exemption was granted to satellite launch services provided by ISRO, Antrix Corporation and New Space India Limited (NSIL). This measure aims to bolster India's space launch service industry.
8. GST Rate for Non-Alcoholic Sanitizers: Non-alcohol based sanitizers will continue to be taxed at an 18% GST rate.
9. Compensation Cess Disbursement (October 2020): A sum of Rs 20,000 crore, representing compensation cess collected up to that point, was slated for disbursement to states by October 5th, 2020.
10. IGST Disbursement: An additional amount of Rs 25,000 crore, corresponding to IGST from 2017-18, was also scheduled for disbursement to specific states by the following week.

The 42nd GST Council meeting first convened on October 5th, 2020. This session was intended for states to choose between two options presented by the GST Council for addressing the compensation cess shortfall.

Option I: The Centre would facilitate Rs 97,000 crore in borrowings for states through a special window managed by the Reserve Bank of India (RBI). This loan would be repayable after five years, along with a reasonable interest rate.

Option II: States could directly borrow the entire shortfall of Rs 2.35 lakh crore from the RBI.

States were given a seven-day period to evaluate and confirm their preferred option. However, the 42nd Council meeting was eventually postponed to October 5th. While some states opted for either Option I or II, others, including Delhi, Punjab, Rajasthan, Chhattisgarh, Tamil Nadu, Jharkhand, Telangana, Puducherry, Kerala, and West Bengal, did not favor either proposal. During the 42nd GST Council meeting, the Council agreed to increase the borrowing limit under Option I to Rs 1.10 lakh crore, based on a 7% revenue growth rate, a revision from the initial Rs 97,000 crore based on a 10% growth rate. Despite this adjustment and nearly eight hours of deliberation, the Council failed to achieve a consensus on the overall borrowing issue. Consequently, the GST Council convened again on October 12th to determine a solution acceptable to all states. Had an agreement not been reached, the Council would have resorted to voting among its members to decide on the final options.

News and Updates on the 42nd GST Council Meeting

• 7:15 p.m.: The GST Council meeting concluded, with the Finance Secretary addressing the media shortly after.
• 7:00 p.m.: Sources indicated that after almost eight hours, the Council failed to reach a consensus on the compensation cess borrowing issue and would reconvene on October 12th, 2020.
• 6:10 p.m.: Sources reported that the Council granted GST exemption for satellite launch services provided by ISRO, Antrix, and New Space India Limited (NSIL).
• 5:50 p.m.: The Finance Ministry announced a delay in the press briefing, stating it would commence once the ongoing Council meeting concluded.
• 4:40 p.m.: Sources revealed that the GST Council rejected a proposal to reduce GST rates on ayurvedic hand sanitizers from 18% to 12%.
• 3:00 p.m.: Sources shared that the GST compensation cess collection would continue until the interest and principal amounts of borrowings made to cover the shortfall were fully repaid.
• 2:20 p.m.: Sources reported that Union Finance Minister Smt. Nirmala Sitharaman would hold a virtual media briefing on the outcomes of the 42nd GST Council meeting at 5:45 p.m. in New Delhi.
• 1:25 p.m.: Sources indicated the GST Council agreed to raise the borrowing limit under Option I to Rs 1.10 lakh crore, based on a 7% growth rate, up from the initial proposal of Rs 97,000 crore based on a 10% revenue growth.
• 1:10 p.m.: Sources noted that West Bengal and Rajasthan opposed the state borrowing option, advocating instead for central borrowings. Some states expressed a preference for Option I.
• 12:40 p.m.: Sources stated that the Centre rejected the idea of establishing a GST Dispute Settlement Authority, citing its incompatibility with the principles of the Constitution of India and the GST Council. It was also mentioned that a similar proposal in 2011 was rejected by the then Parliament Standing Committee.
• 12:30 p.m.: Sources reported that states were presenting their perspectives on the borrowing options provided by the Centre, with Chhattisgarh opposing fund borrowing and demanding a parliamentary discussion on the GST compensation issue.
• 12:10 p.m.: Sources revealed the GST Council decided to extend the levy of GST compensation cess beyond the initial five-year period (i.e., past June 2022). The exact extension timeline would be reviewed and determined periodically.
• 11:20 a.m.: The 42nd GST Council meeting, chaired by Union Finance Minister Smt. Nirmala Sitharaman, began via video conferencing.
• 10:30 a.m.: The GST Council meeting was scheduled to start at 11 a.m. on that day.

Expectations Ahead of the 42nd GST Council Meeting

The much-anticipated resolution for the GST compensation cess was expected to emerge from the GST Council meeting. Following the 41st GST Council Meeting, held on August 27th, 2020, it was decided that a subsequent short Council meeting would be convened to finalize one of the two options presented by the Central Government regarding the GST compensation cess.

Initially, states were granted only seven working days after the 41st GST Council meeting to assess both options and communicate their final decision to the Council. However, due to various factors, the Centre rescheduled the council meeting to October 5th, 2020.

The key outcomes of the 41st GST Council meeting, which took place on August 27th, 2020, were as follows: The annual compensation cess shortfall for the financial year 2020-21 was estimated at Rs 2,35,000 crore. Of this total, Rs 97,000 crore was attributed to the implementation of GST, while the remaining shortfall was deemed a consequence of the COVID-19 pandemic, categorized as an "act of God."

Ultimately, states were provided with two options to address the compensation cess shortfall:

Option I: The Centre would facilitate borrowings of Rs 97,000 crore for states through a specialized window provided by the Reserve Bank of India (RBI). These borrowings would be repaid after five years, accompanied by a reasonable interest rate.

Option II: States could directly borrow up to Rs 2,35,000 crore from the RBI.

While some states chose one of the two options, several, including Delhi, Punjab, Rajasthan, Chhattisgarh, Tamil Nadu, Jharkhand, Telangana, Puducherry, Kerala, and West Bengal, expressed dissatisfaction with both proposals. The GST Council meeting was anticipated to yield a viable solution agreeable to all states. Otherwise, the Council would have proceeded with a vote among its members to decide on the final options.