GST council and states fail to reach consensus on compensation cess — 'No dispute, we may have differences,' says Sitharaman

• The GST Council meeting today ended without any conclusion on states’ compensation cess.
  
• Finance Minister Sitharaman highlighted that there is no dispute between the council and the states — just differences.
  
• She added that the concern of why the centre could not borrow in place of states to meet the compensation cess deficit was addressed.
  
• Majority of states opted for Option 1, where they can borrow ₹1.10 lakh crore from a special window facilitated by the Reserve Bank of India (RBI).
  

The GST Council meeting headed by Finance Minister Nirmala Sitharaman met for a third time to discuss GST compensation cess for states — and failed to reach consensus yet again.

“There is no dispute, we may have differences,” said Sitharaman. According to her, most of the states opted for option 1, and she appealed to others to also vote that way — albeit unsuccessfully.

On the issue of the centre borrowing instead of states, Sitharaman explained that the centre has already issued its borrowing calendar. “If I go beyond that to borrow, it would immediately jack up the bold yields — the G-sec yields will go up,” she said.

G-sec yields are used as a benchmark for all other borrowings in the country. According to Sitharaman, the states borrowing on any other scope would end up paying a very high price if the cost of borrowing increases.

The projected total GST compensation shortfall in the current fiscal stands at ₹2.35 lakh crore, so far.

In the last meeting, the central government released ₹20,000 crore to the states towards compensation shortfall so far in the current fiscal.


The states have two options — but some want a third
Back in August, the council presented the states with two options. They could either borrow ₹97,000 crore from a special window facilitated by the RBI or borrow ₹2.35 lakh crore from the market. It also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.


In the second meeting, the amount of ₹97,000 crore was increased to ₹1.10 lakh crore.

Even though as many as 21 states — which are either ruled by the Bharatiya Janata Party (BJP) or have supported it on various issues — opted to borrow ₹1.10 lakh crore to meet the compensation shortfall, the agreement was not unanimous.

According to Sitharaman, there are certain states that want the centre to bear the burden of borrowing.

Under the prevailing GST structure, taxes are levied under four slabs — 5%, 12%, 18% and 28%. A fifth slab exists on top of the highest tax slab, in the form of a cess is levied on luxury, sin and demerit goods. The proceeds from the extended slab are used to compensate states for any revenue loss.

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