Summary of Points Finalized in the Meeting

Main Agenda
The sole agenda for this meeting was to deliberate on the issue of GST Compensation to States and Union Territories, owing to the sharp fall in GST revenues and growing compensation shortfall, particularly in light of the economic impact of COVID-19.

Financial Status and Legal Context

Around ₹3 lakh crore had been released as GST compensation since July 2017, nearly matching the total cess collection.

As of 31st July 2020, the balance in the Compensation Fund was ₹11,000 crore.

Legal opinion from the Attorney General of India (AGI) clarified that:

The entitlement of States to compensation is guaranteed, but there is no statutory obligation on the Centre to fund it from the Consolidated Fund of India (CFI).

The GST Council has the power to identify alternative sources, including market borrowing, to meet the compensation gap.

Deliberations and Views of Members

Several States (Punjab, Tamil Nadu, Maharashtra, Puducherry, Chhattisgarh, Delhi, Telangana, etc.) argued that the Centre had a constitutional and moral obligation to ensure full and timely compensation and that the Centre should borrow on behalf of States.

Some States (Bihar, Goa, Haryana, etc.) supported the idea of States borrowing, provided there is no fiscal burden and borrowing terms are favourable (low interest, repayment from future cess collections, and not counted under FRBM limits).

Smaller States (Goa, Jharkhand, Puducherry) emphasized immediate release of pending compensation and priority in fund allocation due to severe fiscal stress.

Suggestions included:

Extending the compensation cess period beyond June 2022 until all dues are paid.

Considering new cess items or increased cess rates (e.g., tobacco, luxury goods).

Rationalising GST slabs to increase revenue.

Consensus and Key Decisions

The Council agreed that the shortfall in GST compensation was a critical issue requiring urgent resolution.

Two borrowing options were discussed and accepted for States to choose from (to be finalised in subsequent meetings):
Option 1: Borrow only to cover the shortfall arising due to implementation of GST (around ₹97,000 crore).
Option 2: Borrow to meet the entire shortfall, including that caused by COVID-19 (about ₹2.35 lakh crore).

Repayment of such borrowing would be through future collections of the compensation cess, with the cess levy extended beyond 2022 if required.

The Centre would assist States in facilitating market borrowing by coordinating with RBI and ensuring minimal cost of borrowing.

Committee of Officers to be set up to explore further enhancement of cess items/rates.

Follow-up Actions

The Chairperson directed that detailed calculations, options, and borrowing mechanisms be circulated to all States for consideration before the next GST Council meeting (scheduled in September 2020).

The Council also agreed to take up IGST settlement issues expeditiously (committee under Dy. CM of Bihar).

In essence:
The 41st GST Council meeting focused entirely on addressing the GST compensation shortfall. The Council finalised the principle of borrowing to meet the gap, with two borrowing options offered to States, and agreed to extend the cess period to ensure repayment. There was broad consensus on protecting States’ revenues while maintaining fiscal prudence during the pandemic.