Opposition-ruled states demand extension of GST compensation regime beyond June 2022

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Finance ministers of Opposition-ruled states have demanded that the GST compensation cess regime be extended beyond June 2022.

Briefing reporters after the 45th GST Council meeting in Lucknow on Friday, Union Finance Minister Nirmala Sitharaman had said the regime of paying compensation to states for revenue shortfall resulting from subsuming their taxes such as VAT in the uniform national tax GST will end in June next year.

However, the compensation cess, levied on luxury and demerit goods, will continue to be collected till March 2026 to repay the borrowings that were done in 2020-21 and 2021-22 to compensate states for GST revenue loss.

In his speech at the meeting, Tamil Nadu Finance Minister P Thiaga Rajan demanded continuation of the compensation mechanism, and deferment of a decision on this issue.

While we are broadly, and firmly in favour of the continuation of the compensation mechanism, we are concerned by many of the details, he said.

Thiaga Rajan said all the Council Members will require some time to analyse and assess the features and consequences of the options presented during the 45th meeting, and hence expect that any decision on the way forward will be deferred to the 46th meeting at least.

To be doubly sure, we formally place a request that no final decision be made on this most important issue without the benefit of the time needed to fully assess the options, Thiaga Rajan added.

Briefing reporters, Kerala Finance Minister K N Balagopal on Saturday said he has pitched for extending the GST compensation regime as he highlighted that the state is already grappling with significant revenue shortfall.

In case the GST compensation regime ends next year, the state will face further revenue shortfall, Balagopal said and expressed hope that it would be extended.

Minister of State for Urban Development and Municipal Affairs Chandrima Bhattarcharya said the state has demanded an extension of the compensation mechanism by five years.

It has been decided to set up a GoM for deciding the modalities of compensation mechanism, she had said after the meeting on Friday.

Delhi Deputy Chief Minister Manish Sisodia said the matter of compensation cess would be referred to a group of ministers(GoM).

Briefing reporters on Friday, Sitharaman had said that in the 43rd GST Council meeting it was decided that beyond July 2022 the collection of cess would be for payment of loans taken.

Beyond July 2022, the cess that we are collecting, as agreed in the 43rd Council meeting, was for the purpose of repaying the loan. That commences July 2022 and goes till March 2026 only and only for paying the loan given to states since last year.

So for repaying the loan taken and given to states as back-to- back loan since last year and is continuing this year also, we need to have collection of cess beyond July 2022 and till March 2026, Sitharaman had said.

The Centre has estimated the shortfall in GST compensation payable to states in the current fiscal year at Rs 2.59 lakh crore, of which about Rs 1.59 lakh crore would have to be borrowed this year.

Last fiscal year too, the Centre borrowed and released to states Rs 1.10 lakh crore towards GST compensation.