The Central government on Monday sought to buy peace by accepting states’ demand for full compensation of their shortfall in tax receipts because of the implementation of goods and services tax (GST) or the coronavirus pandemic, but a final call on how states will be compensated will be taken by the GST Council next week.
The federal tax body, which met via videoconference on Monday, decided to extend the GST cess on items such as cars, tobacco and aerated drinks beyond 2022 for as long as needed to repay the debt raised to make up for states’ tax losses.
Union finance minister Nirmala Sitharaman and chairperson of GST Council assured states of full compensation and said that the Centre will disburse to states ₹20,000 crore collected as compensation cess so far this year tonight itself.
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“Nobody is going to be denied compensation for losses arising out of implementation of GST or due to covid impact," said the minister. States’ GST revenue shortfall this year either due to GST implementation or due to covid will be met completely," the minister assured.
Sitharaman’s assurance is aimed at pacifying opposition-ruled states, including Kerala, Punjab and Delhi, that demanded activation of a dispute resolution mechanism to settle the differences over the issue, though it might take time for the political fault lines to get mended.
Kerala finance minister Thomas Isaac said in a tweet after the council meeting that 10 states had demanded that full compensation should be paid this year as per clauses in the law and that the Centre should borrow. “Decision was postponed to 12 October," Isaac said.
Sitharaman said the borrowing to be made by states to meet the shortfall will be outside their already enhanced borrowing ceiling of 5% of gross state domestic product. “Neither the interest nor the principal needs to be paid from states’ other resources. The cess is going to take care of it…The entire compensation is going to be paid. We may have differentiated between covid-related and GST-related. Both are getting paid," the minister said.
Sitharaman also said the collective borrowing for GST-related losses that states may want to raise under the special RBI window has been raised from ₹97,000 crore to ₹1.1 trillion.
The council also decided to release ₹25,000 crore dues for FY18 by the end of next week to states which received less tax revenue from inter-state trade (IGST) due to adoption of an ad hoc disbursement formula.
From 1 January, businesses with sales up to ₹5 crore will be allowed to file quarterly returns and pay taxes on a monthly basis.
The council also decided to exempt 18% GST on satellite launching services aimed at boosting the domestic industry. The move is expected to benefit Isro and Antrix Corp.
The council also decided on the road map for revamping the return filing process with an emphasis on ease of doing business and better compliance.
“The continuing efforts to simplify compliance, including those related to automatic population of various figures in returns from January 2021 are good for business. However, there should be a facility during the initial periods to take care of system errors," said M.S Mani, senior director, Deloitte India.