42nd GST Council Meeting — Compensation Cess Borrowing Crisis

This was the MOST contentious issue of the 42nd Meeting. Background: States were guaranteed 14% annual revenue growth for 5 years (2017-2022). By FY21, the shortfall was ₹2.35 lakh Cr (₹97,000 Cr from GST implementation shortfall + ₹1.38 lakh Cr from COVID impact). The Centre offered two options: Option 1 — States borrow ₹97,000 Cr via special RBI window at low interest (only implementation shortfall); Option 2 — States borrow full ₹2.35 lakh Cr including COVID impact. Opposition states (Kerala, Punjab, West Bengal, Delhi, Chhattisgarh, Rajasthan, etc.) rejected both — arguing the Centre was constitutionally obligated to pay compensation directly. Eventually, Option 1 was enhanced to ₹1.10 lakh Cr, and most states accepted. Kerala filed a Supreme Court case.

The 42nd Meeting confirmed the e-invoice rollout timeline: Phase 1 (1 Oct 2020): Mandatory for businesses with ₹500 Cr+ aggregate turnover — generate IRN (Invoice Reference Number) on IRP portal; Phase 2 (1 Jan 2021): Threshold reduced to ₹100 Cr+; Future phases discussed (₹50 Cr, ₹20 Cr, eventually universal). QR code on B2C invoices was DEFERRED from 1 Oct 2020 to 1 Apr 2021 — businesses weren't ready. Aadhaar authentication was made mandatory for new GST registrations to combat fake registrations (a massive problem — ₹35,000 Cr+ fraud detected by 2020).

The 42nd Meeting focused on compliance relief (India was recovering from the first wave): (1) Late fee cap: ₹500 for small taxpayers (turnover < ₹5 Cr), ₹2,000 for others — for GSTR-3B; (2) Interest waiver: First 15 days of delay — no interest for small taxpayers; (3) Composition taxpayers: CMP-08 for Apr-Jun 2020 extended; (4) Annual returns GSTR-9/9C for FY2018-19: Extended to 31 Dec 2020 (was originally Sep); (5) No enforcement action during COVID period for procedural lapses. Rate relief was NOT the focus — the compensation fight dominated this meeting.

A special composition scheme for brick kilns was introduced: Instead of paying 5% GST on sale value (without ITC), brick kiln operators could opt for a fixed levy of ₹6 per 1,000 bricks manufactured. Why: (1) Brick kilns are largely unorganized sector with poor record-keeping; (2) Determining actual sale value was difficult (cash transactions common); (3) Fixed levy simplified compliance enormously; (4) No ITC claim/reversal issues; (5) Similar to presumptive taxation concept in income tax. This was a pragmatic solution for a sector with 1.5 lakh+ kilns employing 2.3 Cr workers.

The 42nd Meeting was held on 5 October 2020 at Vigyan Bhawan, New Delhi — this was one of the few physical meetings during COVID (most others were virtual). It was also one of the most politically charged meetings in GST Council history. Context: (1) India was 6 months into COVID, economy had contracted 23.9% in Q1 FY21; (2) State revenues collapsed — compensation gap was ₹2.35 lakh Cr; (3) Opposition states threatened legal action; (4) FM Sitharaman presented the two borrowing options; (5) Meeting lasted over 10 hours with heated exchanges; (6) Some state FMs walked out briefly. The compensation issue defined GST politics for the next 2 years.