GST Council: Stormy discussion around states' compensation likely today

States will demand an extension of the compensation period or a change in the GST revenue distribution formula

The all-powerful GST Council might see a stormy discussion around compensation payout to states, with Opposition-ruled states aggressively pushing for its continuation beyond the five-year period which ends on June 30.

Some states ministers wrote to Finance Minister Nirmala Sitharaman on Tuesday seeking a change in the GST revenue distribution formula in case compensation to States is not extended beyond the deadline. 

The primary demand, however, remains to extend the compensation period. 

In a letter to FM Sitharaman, T S Singh Deo, commercial tax minister of Chattisgarh and member of GST Council said provision for 14 per cent protected revenue must continue for at least another five years. This is because mining and manufacturing States in particular suffer great loss of revenue as they are not consumers. 

West Bengal’ Amit Mitra said that Supreme Court’s observation in the Mohit Mineral case was the guiding principle for all the decisions by the Council in future. Kerala and other opposition-ruled States too have called for extension of compensation.

The Centre had agreed in principle to extend the compensation cess till March 2026, to repay the debt it borrowed during the pandemic to meet the demands of the States. 

“Requested an extension of five years on this to protect States from severe revenue loss and let them function as effective federal units of India,” Deo said in a series of tweets, while highlighting that his state suffered loss of Rs 2,786 crore, Rs 3,176 crore, Rs 3,620 crore and Rs 4,127 crore during Fiscal years 2018-19, 2019-20, 2020-21 and 2021-22, respectively.

In a separate letter, principal chief advisor to the chief minister and finance department of West Bengal, Amit Mitra, also reminded Sitharaman about apex court's observation. “Post the decision by the apex court, it has become imperative for the GST Council to take every decision by consensus and to leave aside any shade of majoritarianism, not only for the future credibility of GST Council, but also to uphold the rich tradition of this august body,” he said.

Further, he urged Sitharaman to take note of important observations of the Court and “have serious deliberations on the far-reaching implications of the observation in today’s meeting of the Council, to guide all future decision of the Council in letter and spirit”.

In order to meet the resource gap of the states due to the short release of compensation, the Centre borrowed and released Rs 1.1 trillion in 2020-21 and Rs 1.59 trillion in 2021-22 as back-to-back loans.