The GST Council, at the end of a 5-hour meeting, has taken a step towards solving the tricky compensation issue. According to finance minister Nirmala Sitharaman, states have been presented two options. Common to both options is that RBI will work with states to help raise money to compensate for a shortfall in GST collections.

The solution has not been finalized. States have asked the centre to put the solutions in writing and give them a week to decide on the options. This is an encouraging start. It’s important that both sides work together to find a way out of the situation.

The GST’s legal architecture envisaged a 5-year period after its roll out where states which were unable to collect a threshold amount of tax would be compensated. The weak state of the economy has adversely impacted tax collections, including a cess that was meant to underwrite compensation to states. Finding a way out this situation is essential to allow GST to work to its potential.

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