New Delhi: There is still no consensus between the central and state governments on the issue of GST compensation. But the 21 states that favour the borrowing option given by the Narendra Modi government may be able to go ahead and borrow, Finance Minister Nirmala Sitharaman indicated after Monday’s GST Council meeting.
Sitharaman has questioned if the GST Council can intervene in the matter of individual states borrowing from the markets. Sitharaman herself heads the council as Union finance minister, while states and union territories are members.
This, however, is likely to further ratchet up tensions between the Modi government and opposition-ruled states, with the latter terming the move as “illegal”, as the GST Council is yet to decide on the issue of deferment of compensation payment to future years.
The borrowing proposal
A huge shortfall in the compensation cess collections due to the Covid-19 pandemic and lockdown meant that the central government has been unable to pay states compensation for losses arising out of a shift to GST from the earlier tax regime. The Centre has proposed that the states should borrow Rs 1.1 lakh crore to meet the shortfall — the entire principal and interest repayment will be met out of future cess collections.
However, opposition-ruled states like Kerala, Punjab and West Bengal have pointed out that the revenue shortfall faced by states is much higher than Rs 1.1 lakh crore. They have also opposed the distinction made by the Centre between Covid and non-Covid revenue losses, and pointed out that the Centre is making this distinction to push for lower borrowing.
These states have also pushed for the Centre to do the borrowing and make up the shortfall.
According to the borrowing proposal put forth by the Centre that a majority of states have opted for, while the Rs 1.1 lakh crore of compensation dues will be paid this year through borrowings, the remaining shortfall will be paid to the states over the next few years from collection of the cess, the period of which has been extended beyond 2022. However, while the GST Council has agreed to extend the cess levy beyond 2022, it has not yet agreed to defer the compensation payment to future years.
GST compensation cess is levied over and above the highest tax slab of 28 per cent on so-called sin/luxury goods like tobacco, luxury cars and aerated drinks.
An economic downturn as well as the pandemic has shrunk the compensation pool, making it difficult to pay for the losses incurred by the states.
Sitharaman questions GST council
In a press briefing after the GST Council meeting, Sitharaman said there was no “unanimity” in the council even after repeated discussions spanning a few months.
The finance minister did, however, add that the Centre was ready to facilitate any state which wants to borrow. She also ruled out the central government borrowing anything beyond the announced Rs 12 lakh crore from the markets, pointing out that any such move will push up yields, making it difficult for the states and the private sector to borrow.
“We are open to anyone who wants us to facilitate any loan. Many states have decided to borrow… Even today they said we are going to approach you tomorrow morning,” she said. “We will facilitate the borrowing by states to ensure states end up paying an equitable rate.”
Sitharaman said a majority of the states had opted for the first borrowing option proposed by the Centre, and they are requesting quick access to the funds to battle Covid-19 and meet their expenditure requirements.
The minister also raised the question of whether the GST Council can intervene in the matter of individual states borrowing from the markets. She also said some states have questioned if the GST Council is like the United Nations Security Council, where a veto by one state can stop a decision.
“The GST Council can take a call on extending the period of the cess… Can the council or members of the council stop another state from wanting to borrow and say the cess will go for the repayment of the borrowing?” Sitharaman asked.
Dispute likely to intensify
However, there were enough indications that the dispute is likely to intensify in the coming days.
Calling the move “illegal”, Kerala Finance Minister Thomas Isaac said: “Union FM’s announcement that she is going to permit 21 states to borrow as per option one is illegal,” he tweeted, adding that any such decision needs the approval of the GST Council.
Union FM’s announcement that she is going to permit 21 states to borrow as per Option one is illegal. Option one involves deferment of compensation payment beyond 5 years for which a Council decision is necessary as per AG’s opinion. No such decision has been made in the Council
— Thomas Isaac (@drthomasisaac) October 12, 2020
Isaac further asked why the central government is not pushing for a decision in the GST Council itself, but is announcing decisions outside of the council. He called it a “total disregard for democratic norms”.
It is unfortunate that Union FM does not propose a decision in the Council or even make a statement what she is going to do but choose to make the announcement in the press conference. Why does Centre refuse to take a decision in Council? Total disregard for democratic norms.
— Thomas Isaac (@drthomasisaac) October 12, 2020
States such as Punjab have sought the activation of the dispute resolution mechanism that is part of the Constitution. Some have also threatened to take the matter to the courts.
“We are close to setting up some dangerous precedents: Goodbye to the Constitution, goodbye to compensation Law, goodbye to minutes of council meetings, goodbye to the learned Attorney General’s opinion,” Punjab Finance Minister Manpreet Singh Badal said in his intervention in the GST Council meeting.
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