Applicability of Goods and Services Tax on the remuneration of directors
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This article has been written by Saumya Krishnani, pursuing a Diploma in Business Laws for In-House Counsels from LawSikho.


The GST Council was founded in 2017 with the goal of fostering cooperative federalism. However, the year 2020 will be regarded as the year that the GST Council’s spirit of federalism broke down. When the COVID-19 pandemic struck, the Indian economy was already in a slump. The slowing GST collection and weak economic indicators reflected this. Payments to states were delayed in October due to lower-than-expected collection.

The GST Council failed to reach a consensus on borrowing options offered by the Centre in lieu of the compensation cess shortfall, despite holding several meetings solely to address the compensation question. States were promised reimbursement for any revenue loss in the first five years of the GST’s implementation, which began on July 1, 2017. The shortfall is estimated using a 14 percent annual increase in state GST collections from 2015-16 as the base year. States have been given compensation for any revenue shortfalls until 2022 if they fall below the 14 percent annual growth rate set by the GST since its implementation in 2017.

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GST council meeting: The plan devised

The Centre has said it would borrow up to Rs 1.1 trillion, which is the expected revenue shortfall as a result of introducing the goods and services tax (GST), and lend the states under the special window, which appears to be a relief for the states. The RBI and the finance ministry issued a borrowing calendar that represented the additional funds collected. From October 19 to March 31, a total of Rs 55,000 crores will be borrowed by three-year and five-year tenor securities, taking the total borrowing to Rs 4.88 trillion for the current fiscal year. This could be seen as a victory for opposition-ruled states such as Punjab, West Bengal, and Chhattisgarh, which have argued that the borrowing should be done by the Centre because it is simpler administratively and can be done at a low rate of interest.

The clarification comes four days after the GST Council meeting ended in a deadlock over the compensation scheme, and the dissenting states have been looking into legal options, including bringing the matter to the Supreme Court. The ministry claimed that it would have no effect on the Centre’s fiscal deficit and that the funds would be declared as capital receipts by state governments and used to finance their respective fiscal deficits.

Kerala Finance minister Thomas Issac, added that the question of borrowing in place of GST compensation can be addressed within the GoM, as it has been in the past, and that the council can also address the possibility of the Centre giving anything extra to states, such as offering to take on a portion of the overall borrowing.

The next meeting of the council is scheduled for October 12 to discuss the issue. The government has given states two options to cover the GST compensation deficit: borrow Rs 1.1 Lakh crores to cover the shortfall partially or borrow the whole Rs 2.35 crores deficit. The GST Council meeting on October 5 was unable to make a consensus on these options due to strong opposition from ten states and UTs. A high-ranking official from an opposition-controlled state also supported the third alternative, which calls for the Centre and states to share power.

TS Singh Deo, the commercial taxes minister of Chhattisgarh, questioned why a GoM couldn’t be formed rather than forcing states to choose. “These proposals may be considered,” he said. Deo also rejected the argument that the council is not allowed to vote on borrowing requests. How can the request not be determined by that forum, he asked, if the Centre has submitted it to the council in lieu of compensation due to states? Some states, such as Uttar Pradesh, have proposed revenue-boosting initiatives. 

The GST compensation needs of states have risen considerably beyond what is projected to be obtained through compensation cess, as a result of the Covid-19 pandemic dramatically reducing revenue realization for both the Centre and the states. However, this void must be filled, and the Centre has provided the states with two borrowing options to cover the shortfall in compensation cess collection this year.

The GST Council has yet to obtain unanimous support from the states for this plan, with about ten opposition-ruled states and Union Territories demanding that the options be withdrawn and that the Centre take on all debt to cover the GST reimbursement deficit to states.

The GST regime’s inability to adhere to the spirit of corporate federalism isn’t its only flaw. Even before the pandemic, the government was considering a rate change due to dwindling revenues and expert advice. In 2019, the government established a high-level committee of officers to investigate the revenue deficit and recommend ways to increase collections.

According to government sources, the GST Council does not have the power to sanction state borrowing plans, which must be agreed solely between the states and the Finance Ministry’s Expenditure Department, according to constitutional provisions. The Expenditure Department is now working with individual states to get the borrowing program up and running so that the reimbursement issue can be resolved.

Sources claim that even though all states oppose the borrowing options for GST compensation, the proposal may be carried out so that states are not penalized for their increased spending needs this year as a result of the pandemic.

Other states that do not want to borrow could be compensated from this year’s cess revenue. After June 2022, during the extended duration of cess levy beyond the five-year transitional GST rollout period, the entire payout will be paid out. The Centre has already allocated to the states the entire Rs 20,000 crores received from the GST reimbursement cess this year. The cess collection for this year is estimated to be around Rs 65,000 crores.

At the previous GST meeting in August, the Centre offered the states two borrowing options, one of which included measuring the GST-related revenue shortfall at Rs 1, 10,000 crores and borrowing it from the Reserve Bank of India under special dispensation (RBI). This loan will not be included in any of the states’ current borrowings, and the entire interest and principal will be paid by reimbursement cess, including the extended time levy.

The states’ second option is to borrow the entire projected shortfall of Rs 2, 35,000 crores this year, with the borrowing only being repaid to the states during the extended duration of GST reimbursement cess levy.

Finance Minister Nirmala Sitharaman told the media on October 5 that the decision to meet again on October 12 was suggested by Bihar Deputy Chief Minister and Finance Minister Sushil Modi after the Council’s meeting failed to break the deadlock between the Centre and the State governments. Option 1 was approved by the majority of nations, but that does not mean it can be enforced on others, according to Sitharaman. “I think we need to talk more,” she said. “I was politely reminded that I cannot take anyone for granted… While I don’t take anything for granted…” she said solemnly.

High Price 

On a procedural level, the Council approved several reforms that will reduce the amount of returns that smaller companies must file from 24 to 8 beginning January 1, 2021. The Council has agreed to limit refunds to bank accounts authenticated by Aadhaar, while making Aadhaar authentication mandatory for all refund applications, based on investigations into cases where taxpayers vanished after seeking GST refunds.

Expectation from Council meeting 

  • The Centre will provide Rs 97,000 crores in borrowings to the states through a special window set up by the Reserve Bank of India (RBI). This loan will be repaid over the course of five years, with a fair interest rate.
  • The states will directly borrow the entire Rs.2.35 Lakh crores shortfalls from the RBI.


The Finance Minister clarified that the government has released a borrowing schedule, and if it borrows outside of it, the G-Sec deals, which are used as a benchmark for all other borrowing, would grow. This will lift borrowing rates for both the public and private sectors. The GST Council had deferred a decision on compensating states for the shortfall at its last meeting on October 5 after ten states governed by non-National Democratic Alliance (NDA) parties requested that the Centre borrow the entire Rs 2.35 Lakh crores and reimburses them. To cover the compensation shortfall, 21 states, most of which are BJP-ruled or have backed it on various issues, have agreed to borrow Rs 1.10 Lakh crores. The Centre has issued Rs 20,000 crores to the states so far this fiscal year to cover compensation shortfalls.

Bringing petroleum products into the GST fold has also been a long-standing demand. Petroleum products were included in the scope of GST by the central government, but five products – crude oil, gasoline, diesel, aviation turbine fuel, and natural gas – were temporarily excluded. They were supposed to be included whenever the GST Council felt like it. Otherwise, the new decade would have heralded the possibility of a GST rate change, but with the Indian economy mired in recession, the wait could become much longer.


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