Covid-19 crisis: States divided on alternative GST compensation mechanism

The compensation mechanism has come under strain because of low collections amidst weak consumer demand, exacerbated by the Covid-19 pandemic. (Illustration: Ajay Mohanty)
States might not arrive at a consensus on an alternative mechanism to compensate them for the shortfall in goods and services tax (GST) collection at the council meeting, expected to be held in a couple of weeks, as divergent views have emerged on the issue.

While Punjab and Kerala will press the GST Council to borrow in order to compensate states, Bihar Deputy Chief Minister Sushil Kumar Modi called the idea “wishful thinking”, arguing that states will need to “learn to live with the revenue shortfall”. West Bengal and Assam feel the council has no power to borrow. The compensation mechanism has come under strain because of low collections amidst weak consumer demand, exacerbated by the Covid-19 pandemic.

Although collection of compensation cess improved significantly to Rs 6,020 crore in May, from Rs 990 crore in April, this was still about 22 per cent lower than the same month last year. Cess collection April was 88 per cent lower than the previous year. To address this the council last month decided to hold a single-agenda meeting in July to discuss the compensation issue.

Punjab Finance Minister Manpreet Singh Badal told this newspaper that he will pitch for market borrowing to compensate states. “Our stand will be to extend the cess collection period for another 2-3 years for the repayment.”

Echoing Badal’s views, Kerala Finance Minister Thomas Isaac said the GST Council should be allowed to borrow from the markets to pay states. He argued that the Centre could provide a sovereign guarantee. “It is a fund (compensation cess), which can borrow. Centre can give the guarantee, what is the problem there,” he said.
However, Modi told Business Standard that borrowing would not be feasible for both the Centre and states. “I personally feel that borrowing from the market is wishful thinking as no one will give a loan at this time. The question is also, who will take a loan and how will it be repaid,” he said.

He said states will have to accept that compensation will not be possible in case cess collection is inadequate. 

West Bengal Finance Minister Amit Mitra said the council does not have any equity or security to offer to be able to borrow. He said former finance minister Arun Jaitley had discussed a scenario where there would be a shortfall in cess collection and the possibility of borrowing from the market. “He had said that we may have to borrow and pay back after the sixth or seventh year after the compensation period is over. The question is how? The GST Council doesn’t have a locus standi, how can it borrow? It doesn’t have equity and doesn’t have any security to offer.”

Mitra added that the only option is a sovereign guarantee by the Centre. 

“But we don’t even know if that will happen,” he added.

Assam Finance Minister Himanta Biswa Sarma said that it would not be possible for the GST Council to borrow. Only the Centre can do so. “The GST Council is neither a sovereign body nor a sub-sovereign body. So even if you take a loan, somebody has to give a guarantee. If the central government gives guarantee to loans, the central government can itself borrow,” he said.

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