No consensus on borrowing for shortfall in GST compensation cess, says FM

Topics GST | Coronavirus

Finance Minister Nirmala Sitharaman addressing the media today
Finance Minister Nirmala Sitharaman is addressing the media on a meeting of the Goods and Services Tax (GST) Council that was to settle a dispute between the union government and states governed by Opposition parties over GST compensation owed to state governments for fiscal 2021.

 
Ten states, which are governed by parties not part of the National Democratic Alliance, have rejected the finance ministry’s proposal that the state governments should borrow to meet the shortfall in GST revenue and have demanded the setting up of a dispute settlement mechanism.

 
Sitharaman, earlier in the day, addressed announced steps to stimulate consumer demand including advance payment of a part of the wages of central government employees for spending during the festival season and a 50-year interest free loan to states, part of efforts to bolster the pandemic-hit economy.

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GST Council meet ends without reaching consensus on compensating states

The stalemate over compensating states for the shortfall in GST collections continued on Monday with a meeting of the GST Council ending without reaching any consensus.
 
The panel, which is the highest decision-making body on indirect taxes, for the second time in a week failed to reach a consensus on the Centre's proposal of states borrowing against future GST collections to make up for the shortfall.
 
This was the third meeting in a row that discussed compensation shortfall without a decision.
 
Finance Minister Nirmala Sitharaman, who heads the Council, said the Centre cannot borrow and pay states for the shortfall as it would lead to rise in bond yields, resulting in rise in borrowing costs for the government and the private sector.
 
However, this would not be the case if states borrowed against future GST receipts, she said, adding 21 states had agreed to borrow as suggested by the Centre.
 
However, other states insisted on a decision to be taken by consensus, she said.
CNBC-TV18 reports that Finance Minister Sitharaman appeals states to take the central government's first option on GST compensation. The government has offered two solutions to states: borrow Rs 97,000 crore, which is the result of the shortfall owing to GST implementation, through the special window facilitated by the central bank, or borrow the full shortfall in compensation (Rs 2.35 trillion), which includes the impact of the Covid-19 pandemic, from the markets, to be facilitated by the central bank.
The amounts will be paid by the compensation cess, which will extend beyond June 30, 2022. In the case of the second option, the proposed extension of cess will be used for paying only the principal, not the interest. The option of the special window was raised to Rs 1.1 trillion at the October 5 meeting.
 
Business Standard reported on Monday that at least 21 states and Union Territories that had agreed to the Centre’s options are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand, and Uttar Pradesh.
 
The Centre needs the support of 20 states to pass a resolution in the GST Council in case voting is required.
Here is some background on the dispute. The central government offered two solutions to states: borrow Rs 97,000 crore, which is the result of the shortfall owing to GST implementation, through the special window facilitated by the central bank, or borrow the full shortfall in compensation (Rs 2.35 trillion), which includes the impact of the Covid-19 pandemic, from the markets, to be facilitated by the central bank.

Finance Minister Nirmala Sitharaman addresses media

Interest free 50-yr loans offered to states. Split in three parts

Part 1: Rs 1,600 cr for NE states and Rs 900 cr for Uttarakhand and Himachal (total Rs 2,500)
Part 2: Rs 7,500 cr for other states in proportion to share in Finance Commission devolution 50% initially (to be spent by March 31, 2021)
Balance after use of first investment
Unutilised funds to be reallocated
 
Part 3: Rs 2,000 cr for states which meet at least 3 out of 4 reforms given in Atma Nirbhar fiscal deficit package

Finance Minister Nirmala Sitharaman: To stimulate demand, expenditure will be front-loaded

New schemes include LTC cash voucher scheme and special festival advance.

Rules of the LTC cash voucher scheme summarised

Govt employees, other organised sector employees to get equivalent of their LTC even without travelling

Govt employees, other organised sector employees to get equivalent of their LTC even without travelling. They could use the allowance to make purchases of their choice. this will apply on purchase of goods that attract 12% GST or more.

LIVE: LTC Cash Voucher Scheme

* Some initial indications show that savings have increased as in lockdown people couldn't spend.
 
* Govt employees get leave travel allowance in block of four years - one to anywhere in India and one hometown or two for home town. Air or rail fare will be reimbursed and leave encashment of 10 days will be paid to them: FM

LIVE: Proposals being presented today can stimulate demand

Consumer Spending proposals have two components
LTC cash voucher scheme
Special festival advance scheme

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