Finance Minister Nirmala Sitharaman on Thursday during the 41st meeting of GST Council said that "States have asked us to give them 7 working days to think about the options. These options would be available only during the current year, the situation would be reviewed next year. We may have another GST meet soon."
"There may be some states which may prefer to get hard-wired compensation rather than going to market to borrow more. The option was tailor-made considering that states can take a call depending on the compensation they expect to come," she added.
She added that "Once the arrangement is agreed upon by GST Council, we can proceed fast & clear these dues and also take care of the rest of the financial year. These options will be available only for this year; in April 2021, the Council will review and decide action for the 5th year."
On being asked about GST cut for two-wheelers, Nirmala Sitharaman said that "Two-wheelers may merit to go to the GST council for consideration." She also said that "Government will give a further relaxation of 0.5 percent in states' borrowing limit under the FRBM Act as 2nd leg of Option 1. States can choose to borrow more, beyond expected compensation itself, since that is the injury caused by COVID-19."
The Finance Secretary Ajay Bhushan Pandey said that the GST collection has been severely impacted this year, due to the coronavirus pandemic. As per the GST Compensation Law, the states need to be given compensation, the Finance Secretary said.
Ajay Bhushan also said that the Central government has released more than Rs 1.65 lakh crore as GST compensation to states for Financial Year 2019-20, including Rs 13,806 crore for March. The total amount of compensation released for 2019-20 is Rs 1.65 lakh crore, whereas cess amount collected was Rs 95,444 crore, he said.
The Finance Secretary also said that "Attorney-General said that GST Compensation has to be paid for a transition period- from July 2017 to June 2022. Revenue has to be protected compensation gap to be met from the cess fund, which in turn has to be funded from the levy of cess."
"As mentioned by Finance Minister in the GST Council meeting held in March, legal views of the matter were sought from the Attorney General of India who said that GST compensation has to be paid for the transition period from July 2017 to June 2022," he said.
As per Ajay Bhushan Pandey, the Attorney General of India said that protected revenue has to be protected but the compensation gap to be met from cess fund, which in turn has to be funded from levy of cess.
He also said that the "Compensation gap which has arisen this year (expected to be Rs 2.35 lakh crores), is due to COVID-19 as well. The shortfall in compensation due to the implementation of GST has been estimated to be Rs 97,000 crores, he added.
The clear opinion Attorney General was that compensation gap cannot be met from India's consolidated fund, he said, adding that "Option 1 presented to GST Council was to provide a special window to states, in consultation with RBI to provide Rs 97000 crores at a reasonable interest rate."
"Option 2 presented to GST Council was that the entire GST compensation gap of ₹ 2,35,000 crore of this year can be met by states, in consultation with RBI, he said. The options will be sent to states for a view within 7 Days and will apply for this fiscal year only.
The Revenue Secretary said "Repayment of loans, including interest payments, will be made through the cess collected from 6th year onwards. In no case, states will be burdened i.e they will not have to tap into other sources of revenue for loan repayment."