P Chidambaram asks states to confront Centre on compensation cess issue; will states stick to their guns?

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October 6, 2020 4:20 PM

The liability to provide the GST compensation to the full extent falls on the central government thus the onus of finding the resources also falls on the central government.

p chidambaram, gst council meet, compensation cess issue, gst on sin goods, nirmala sitharamanThough the centre has increased the borrowing limit under option one, the same is not expected to pacify the opposition-ruled states and they are expected to stick to their guns.

Former Minister of Finance P Chidambaram today said that it is unfair and unjust to ask state governments to borrow the money and the states must stand firm at the next meeting on 12 October. The liability to provide the GST compensation to the full extent falls on the central government thus the onus of finding the resources also falls on the central government, P Chidambaram added in a tweet. The former finance minister also complimented the 9-10 states that stood firm and rejected the two options given by the central government to bridge the gap in the GST compensation cess. 

It is to be noted that non-BJP ruled states are in disagreement with the Centre on the compensation issue. States were earlier given seven days’ time to think and respond over the proposal but the opposition-ruled states were in disagreement. “Though the centre has increased the borrowing limit under option one, the same is not expected to pacify the opposition-ruled states and they are expected to stick to their guns in the upcoming meeting on 12 October,” said Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors LLP. It may force the centre to either constitute a committee of ministers or formulate other dispute resolution mechanism to bring consensus, Divakar Vijayasarathya added. 

Following the 42nd GST Council meeting, Finance Minister Nirmala Sitharaman had said that even if states do not choose any of the two borrowing options, nobody is going to be denied compensation arisen due to GST implementation or coronavirus impact. The decision is to be made is on the extent of borrowing and on the options given by states. While some question arose on the issue of law on compensation cess, the finance secretary further clarified that the law requires compensation to be paid and the levy of compensation has been extended beyond 2022. Hence, the compensation gap remaining in 2022 will be paid and the question of law will be addressed.

Though extending the period for levy of compensation cess was expected, timely disbursement of cess is a more important issue amid the ongoing coronavirus crisis. Facts such as inconsistencies in the utilisation of compensation cess funds and inordinate delays in disbursements to states are very disturbing, said Gunjan Prabhakaran, Partner & Leader – Indirect Tax, BDO India. It could stumble the confidence of the stakeholders and lead to a further extension in the levy of cess, Gunjan Prabhakaran added. 

Meanwhile, small taxpayers got some reason to cheer after the outcomes of the GST Council meeting was announced. It has been decided that small taxpayers will not have to file monthly returns and their compliance to provide HSN details for B2B transactions are also limited to 4 digits. Small taxpayers must continue to upload invoices dynamically and also accurately to make sure their customers are able to claim ITC on a timely basis, said Archit Gupta, Founder and CEO, Cleartax. Payment of tax on an estimated basis would make life easier for small taxpayers as they can then carry out detailed ITC reconciliation quarterly.

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