OCTOBER 07, 2020

By Vijay Kumar

THE Good news in this good and simple tax this week is that after the GST Council Meeting on Monday, the Finance Minister announced in her Press conference that she is giving to the States an amount of Rs. 20,000 crores and some dues pertaining to 2017. The FM said, "this year, till now whatever has been collected under the compensation cess which totals approximately to about 20,000 crores will get disbursed tonight; so there wouldn't be anything kept behind; the entire amount will be disbursed."

So, what is being paid is what is collected, not what is due. Well, Covid has killed the concept of compensation.

Formula One - No formula

The FM said,

A long pending issue of IGST has been festering us for a very long time; it's been lingering, waiting to get resolved. It was actually something like one lakh sixty thousand - sixty five thousand which as a quick resolution at that time was divided into two halves and about 80,000 was given away to the states because at that time there was no formula based on which the IGST could be divided. Post that, I think the formulation was arrived so that instantly IGST gets devolved and continues to get devolved but till before that formulation was arrived at, this one lakh sixty thousand had accumulated and at one point in time, it was decided that it should be divided into two halves and shared among the states and as a result it created several anomalies.

States which shouldn't be receiving a certain amount received that much; States which had to receive more didn't receive more and States which had to receive less received more; as a result even the following year's calculations all got distorted and since the time after 2019 when this government was formed, I had spent considerable time with the entire department of revenue to look at ways in which this can be resolved. A call was taken that this has to be corrected and then the formulation with which even if the money was devolved to the states which had to get the money which had got earlier far lesser than what they should have got.

Difficulty arose about how to get the money back from States which had received more. We wanted to have a way in which that can be solved without burdening the states today because at this time, States need more money. To ask them, however rightly, for some payment which was done to them earlier which they didn't have to get, at this time would have meant a burden on the States. So we didn't intend to take the money back. However because it's public money, they had to be some kind of a formulation through which if not now, sometime they can repay. So, a committee under the chairmanship of the Bihar minister Sushil Modiji was formed. They worked out the ways in which it can be done. So for now 24,000 crores which has to actually go to those states which received less will be given to them, thereby those States which received less would actually get what they should have got at least now and therefore the account gets closed in their regard but for those States which had received more who shouldn't have received that, we are not asking them to pay back that surplus amount now. They would be gradually retrieved from the States. So an amount of 24,000 crores which is the IGST due which has to be paid to many of the States which had received less earlier will be done in the middle or by the end of the next week and why is that so? Because the Secretary, Expenditure who actually has to do all these, is on leave; the moment he comes, he will attend to that but the decision to disburse that amount has been taken.

Extend Cess

The FM stated that the cess will have to be extended beyond the five years for which originally it was mandated. So the fact that the borrowing has to happen; fact that the interest on the borrowing will be paid through the cess was well appreciated and it was welcomed by all that the proposal on the table to have the cess collected beyond five years.

The Option: Co-operative Federalism

The FM said,

This question of some States not wanting option one and a state wanting to have an option three which they have written to the PM about and that which was forwarded to us and for which a reply would go. So, the question was, well, it could be that 20 states would have chosen option one but there are some of us who have not chosen any and from among the those who have not chosen any, the argument was that it should be the centre which borrows.

So, on this there was a lot of discussion and coming almost to the end of the day it was felt that you can't really decide on the basis of the 20 who have written to you; we need to talk further and therefore and also I was sort of gently reminded that I can't take anybody for granted; I don't take anybody for granted; I said this there and I'm saying it here and I've always been open for more and more talk which is what I said there and I'm saying it here too and as a result since there was a suggestion which came from Bihar's minister Sushil Modi that may be the council if it wants to talk further although he also underlined the fact that states are in desperate need for money and those who have chosen should at least be allowed to go ahead. It can't be that it can be held back just because a few states are also not happy with the options. Those who have opted should be allowed to go ahead was also voiced by a few other states but then a senior member Sushil Modi suggesting that maybe you want to give one more day, couple of days later three four five days later he said that we can meet again and if necessary sort this out and therefore not choosing to give just four or five days, I gave clear eight days and said we can meet on the 12th of October.

Complicated Compensation Calculation

The FM explained,

We had made a calculation that the protected revenues if growing at 10 percent would have meant the difference between the protected at 14 percent and calculated growth at 10 percent, that is the difference for which you had to give the compensation. On that, the recommendation from very many States was, can you not bring it down thereby more money can reach the States. So we had before the meeting itself decided based on the inputs which had come that 10 percent based calculation will be brought down to 7 percent based calculation which means not 97,000 crores which was earlier mentioned as the money which is the gap which has to be borrowed rather than given from nothing that we have earned, borrow it and pay it; instead now that 97000 crores would go to 1 lakh 10,000 crores; so that was a change which we have made based on the suggestions which had come.

The way in which the repayment schedules can happen - the interest on the borrowed amount would be the first charge on the cess which gets collected beyond the five years; next charge would be say 50 percent towards the principal amount which gets borrowed which is 1 lakh 10,000 crores. The original figure subject to correction was 235 right 2 lakh 35 or 1 lakh 95 which will be the gap; total gap this year; total gap meaning the gap which is hard wired in the Act which is the protected versus the 10 percent, now that it is seven percent is one gap which is the GST implementation gap. Obviously when the GST law was being framed nobody anticipated a covid-like situation. So a provision for this extraordinary kind of situation was not made in the Act. So anything which is beyond that 14 percent minus the 10 percent was not ambitioned in the GST constitutional amendment; therefore anything below that 14 minus the 10 percent, which is now minus the 7 percent, anything beyond that, below that is, what we would call as the core with affected gap; that gap will be paid out of the cess which gets collected after five years. So first charge will be on the interest, second 50 will go to paying of the principal amount and the next 50 percent will be the payment towards the core with affected compensation which could have been otherwise paid had the collection been all right. So instead of leaving the states without anything because they are paying the interest; because they are paying the principal amount which is 1 lakh 10,000 it was probably at the officers level discussed several times and decided that after the interest goes whatever is left of the new compensation cess that gets collected, there should be a division between what gets paid for the principle that you borrow and the rest should be towards this compensation which we are not borrowing now but which can be paid on a monthly basis from that collection; so that broadly was explained so that the states will not be left without anything like as though you go on a you know high and then you get dropped without anything coming back to you; you drop off the cliff - that won't happen; you will get something gradually for the monies which this year you don't seem to collect; the time frame will be worked out.

But it's a question of law you said it, right?

The FM looked a little angry when she said,

What is the question of law here; what's the question of law here; we have not denied compensation which is due to the states? I have explained it here that the compensation arising out of the GST implementation which goes on a formula - it's not my imagination; it goes on a formula and I've explained the formula too to you that it gets borrowed and it is given to the States. Nobody anticipated covid; the lawmakers did not anticipate; the GST council did not anticipate; the empowerment committee did not anticipate and it's not as if the centre sitting over money which is to be given to the States and we're denying them; after all everything has to be borrowed. so the question of law that you are talking about, I want to ask you what is the question of law? Have I denied any compensation and if 21 states have written to me should I not even say it and by saying it, am I pushing anybody to do anything? No, but yet 21 States have written it; do I put it on record or not; I can't be told you shouldn't even mention because that gives a feeling that the majority is deciding; no, even that will be unfair to the states which have already come forward to say, "get us the money". It is actually required of me to say it so I can't be told right both the ways, this as well as that. I don't say it you would say "oh my god, we've opted and you have not said it" and I say it I'm being told, "sorry you can't be telling that you have the majority and if indeed that was the rule." It's not me even today in the council, division didn't come from me; the call for division even today and the last time the division happened in my tenure; even then and even now, it's not me who's asked for division.

In the best of times, GST is complicated and confusing. This, certainly, is not the time to administer GST. It's not easy to be FM.

Until next week