Finance Minister Nirmala Sitharaman addressing the media today
Finance Minister Nirmala Sitharaman is addressing the media on a meeting of the Goods and Services Tax (GST) Council that was to settle a dispute between the union government and states governed by Opposition parties over GST compensation owed to state governments for fiscal 2021.
Ten states, which are governed by parties not part of the National Democratic Alliance, have rejected the finance ministry’s proposal that the state governments should borrow to meet the shortfall in GST revenue and have demanded the setting up of a dispute settlement mechanism.
Sitharaman, earlier in the day, addressed announced steps to stimulate consumer demand including advance payment of a part of the wages of central government employees for spending during the festival season and a 50-year interest free loan to states, part of efforts to bolster the pandemic-hit economy.
GST Council meet ends without reaching consensus on compensating states
The stalemate over compensating states for the shortfall in GST collections continued on Monday with a meeting of the GST Council ending without reaching any consensus.
The panel, which is the highest decision-making body on indirect taxes, for the second time in a week failed to reach a consensus on the Centre's proposal of states borrowing against future GST collections to make up for the shortfall.
This was the third meeting in a row that discussed compensation shortfall without a decision.
Finance Minister Nirmala Sitharaman, who heads the Council, said the Centre cannot borrow and pay states for the shortfall as it would lead to rise in bond yields, resulting in rise in borrowing costs for the government and the private sector.
However, this would not be the case if states borrowed against future GST receipts, she said, adding 21 states had agreed to borrow as suggested by the Centre.
However, other states insisted on a decision to be taken by consensus, she said.
CNBC-TV18 reports that Finance Minister Sitharaman appeals states to take the central government's first option on GST compensation. The government has offered two solutions to states: borrow Rs 97,000 crore, which is the result of the shortfall owing to GST implementation, through the special window facilitated by the central bank, or borrow the full shortfall in compensation (Rs 2.35 trillion), which includes the impact of the Covid-19 pandemic, from the markets, to be facilitated by the central bank.
The amounts will be paid by the compensation cess, which will extend beyond June 30, 2022. In the case of the second option, the proposed extension of cess will be used for paying only the principal, not the interest. The option of the special window was raised to Rs 1.1 trillion at the October 5 meeting.
Business Standard reported on Monday that at least 21 states and Union Territories that had agreed to the Centre’s options are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand, and Uttar Pradesh.
The Centre needs the support of 20 states to pass a resolution in the GST Council in case voting is required.
Here is some background on the dispute. The central government offered two solutions to states: borrow Rs 97,000 crore, which is the result of the shortfall owing to GST implementation, through the special window facilitated by the central bank, or borrow the full shortfall in compensation (Rs 2.35 trillion), which includes the impact of the Covid-19 pandemic, from the markets, to be facilitated by the central bank.
Finance Minister Smt. @nsitharaman chairing the GST Council meeting via video conferencing in New Delhi today. MOS Shri. @ianuragthakur, Finance Ministers of States & UTs and Senior officers from Union Government & States are also present in the meeting. pic.twitter.com/N7kuUit5Gh
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