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At least 10 states to reject Modi govt’s borrowing options, say GST compensation their right

Tamil Nadu CM writes to PM Modi, other state finance ministers have virtual meeting to prepare for prolonged battle with central govt on GST compensation.

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New Delhi: Punjab, Tamil Nadu, Delhi, Chhattisgarh, Kerala, Telangana and West Bengal are among around 10 states that are set to reject the two borrowing options provided by the Narendra Modi government to meet the goods and services tax (GST) compensation shortfall.

In a letter to PM Modi, Tamil Nadu Chief Minister Edappadi K. Palaniswami demanded states be paid the full compensation, and said the Centre has the moral and legal obligation to pay the states. He pointed out that asking states to borrow will reduce the overall resources available to the states by Rs 2 lakh crore.

“This will really hurt spending by states on many crucial Covid-19 and non-Covid-19 related expenditures,” the letter said. He proposed that the central government should borrow and lend the money to the GST compensation fund with repayments to be made against future cess receipts.

Meanwhile, in a letter to Union Finance Minister Nirmala Sitharaman, Punjab Finance Minister Manpreet Singh Badal said the Centre’s two options are a breach of constitutional assurance and betrayal of cooperative federalism. ThePrint has accessed a copy of the letter.

Badal also suggested invoking the dispute resolution mechanism to resolve the issue.

Also read: BJP & non-BJP states join hands to take on Modi govt over unpaid GST dues

The two options

In a note to the states Saturday, the Centre had rejected their demand that it should do the borrowing, and proposed two options — borrow Rs 97,000 crore (revenue shortfall arising on account of GST implementation and not taking into account the Covid-19 impact) or borrow the entire Rs 2.35 lakh crore.

If states opt to borrow Rs 97,000 crore, the entire principal and interest repayment of the debt will be met through cess collections in later years, the central government said. In addition, the states are being given relaxations to borrow an additional 0.5 percentage points under the Fiscal Responsibility and Budget Management (FRBM) Act.

However, if the states opt to borrow the higher amount, only the principal amount will be repaid from the cess and the states will have to bear the interest burden.

States have pointed out that while the first option is insufficient to meet their revenue loss, the second option entails bearing the interest loss, making it untenable. They have also flagged the distinction of revenue losses made by the Centre as Covid and non-Covid as “untenable”.

Chhattisgarh CM Bhupesh Baghel also wrote to Sitharaman Monday, pointing out that states have not got the compensation due for the first four months of the current fiscal. He reminded the finance minister that the Constitution requires the Centre to compensate states for losses arising on account of GST, and asked the Centre to do the same by borrowing.

“Now that we fully understand Centre’s intentions on GST compensation, we have no choice other than to reject them lock, stock and barrel,” Kerala Finance Minister Thomas Isaac wrote on Twitter Monday, adding that compensation is a state’s fundamental right.

West Bengal Finance Minister Amit Mitra had also rejected the options Sunday, terming them a “Hobson’s choice”.

Virtual meeting

At least six state finance ministers also held a virtual joint meeting and decided to reject the Centre’s both proposals, saying the Centre should be borrowing and not the states, according to Chhattisgarh’s T.S. Singh Deo. The states will also push the Centre to arrive at a consensus in the GST Council rather than pushing through its agenda in an “authoritarian manner”, he said.

Isaac said the Centre should be paying the compensation regardless of whether it is an act of God, humans or nature.

Also read: States should reject GST compensation options, demand money in one voice, says Chidambaram


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