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New Delhi: Opposition-ruled states have decided not to drag the Narendra Modi government to the Supreme Court over the issue of Goods and Services Tax (GST) compensation after the central government agreed to borrow a part of the amount to meet the shortfall and then pass it on to the states.

However, the states are likely to drive a hard bargain to push the central government to borrow an amount higher than the Rs 1.1 lakh crore envisaged to compensate the states.

The total revenue loss to states that will not be met through the GST compensation cess collections is estimated at Rs 2.35 lakh crore in the current fiscal.

Also read: I don’t take anybody for granted, says Sitharaman after stormy GST council meet over dues

States want Centre to borrow entire shortfall amount

As per the current plan, the central government will borrow Rs 1.1 lakh crore and pass it on as back-to-back loan to the states. The interest and principal repayment of this loan will be met through future compensation cess collections.

This leaves more than Rs 1 lakh crore of shortfall for states that remain uncompensated. States want the Centre to negotiate on this amount.

However, the Centre plans to defer the remaining compensation payment for the current year beyond 2022. This will be paid from compensation cess collections after meeting the interest and principal repayment of the borrowings.

Kerala Finance Minister Thomas Isaac tweeted Saturday that the state has cancelled a high-level meeting that had been called to discuss the issue of the state approaching the Supreme Court.

“Having amicably settled (the) question of who should borrow, we hope she (Finance Minister Nirmala Sitharaman) will address (the) question of how much to borrow through dialogue with state FMs,” he wrote.

Kerala has asked the Centre to negotiate with the states the extent of the compensation that will not be paid this year and will be deferred to 2023.

Speaking to ThePrint, Chhattisgarh Finance Minister T.S. Singh Deo said the central government should be open to compensate the states for the entire shortfall and not just by Rs 1.1 lakh crore.

“Full compensation is guaranteed for five years with bimonthly payments,” he said.

He said that all the Congress-ruled states will discuss the way forward, adding that the Centre cannot leave the states to fend for themselves.

Congress leader and former finance minister P. Chidambaram also stressed the need for the Centre to borrow the entire shortfall amount.

“Having taken the correct first step, I urge the PM and the FM to take the second step also and re-establish the trust between the Centre and the States,” he said.

Sitharaman writes to states

Tensions between the Centre and the states escalated after an economic slowdown, compounded by the Covid pandemic, led to a sharp fall in compensation cess collections. Due to this, the central government expressed its inability to pay the states.

GST compensation cess is levied over and above the highest tax slab of 28 per cent on so-called sin goods such as tobacco, luxury cars and aerated drinks.

The Centre proposed that the states should borrow the shortfall amount from the markets. However, most opposition-ruled states like West Bengal, Kerala, Punjab, Telangana and Chhattisgarh did not favour this option.

After months of negotiation in the GST council, where the matter remained unresolved, the central government Thursday said it will borrow Rs 1.1 lakh crore as part of the special liquidity window and lend it to the states.

Finance Minister Nirmala Sitharaman followed it up with a letter to the states explaining the rationale behind the move, and how it will enable ease of coordination and uniform interest rates.

Sitharaman also said that by agreeing with the Centre, the states will be also able to separately borrow Rs 1.06 lakh crore in the current fiscal equivalent to 0.5 per cent of their gross domestic product. However, for this amount, the interest and the principal repayment will have to be met by the states.

Also read: Centre vs states GST row doesn’t matter. What matters is reviving economy & a borrowing plan


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