GST Council meet: States to push for borrowing by Centre on Thursday

States have objected to borrowing from the market themselves, and will seek an extension to the compensation period beyond the promised FY22
Ahead of the crucial single-agenda GST Council meeting on Thursday, most states — including those governed by the BJP — reached a consensus that the Centre should borrow to compensate states for the revenue shortfall owing to inadequate cess collection. 

States have objected to borrowing from the market themselves, and will seek an extension to the compensation period beyond the promised FY22.

Sushil Kumar Modi, deputy chief minister of Bihar, told Business Standard that market borrowing appeared to be the only logical option, that too by the Centre. “It would be better if the Centre borrowed, because it would have to provide guarantee for states’ borrowings anyway. Besides, the Centre will be able to borrow at a lower interest rate,” he said. 

He added that raising tax slabs by a percentage point each would only result in additional revenue of Rs 60,000 crore, compared to the projected shortfall of Rs 3.65 trillion in FY21. “Collections in the present fiscal year are estimated to be 65 per cent of last year’s. Raising tax rates immediately may not be feasible due to the pandemic. Even if a few more items are added to the cess basket, it will not make much of a difference,” Modi added.


Repayment of the borrowed sum will have to be made from cess collections, which is only available till FY22 and needs to be extended by 3-5 years, according to the states’ view.

No compensation has been paid for FY21 so far, even as four months’ compensation (till July) is due under the bi-monthly payment mechanism.

According to finance ministry sources, Attorney General K K Venugopal has suggested that the Council recommend to the Centre for allowing states to borrow on the strength of future receipts, from the compensation fund. 

The AG also noted that the Centre had no legal obligation to pay any compensation to states. Amit Mitra, finance minister of West Bengal, said in a letter to Union counterpart Nirmala Sitharaman on Wednesday that “under no circumstances” should states be asked to borrow as it would increase their debt servicing liability. 

“Further, it may lead to a cut in state expenditure, which is not desirable at this juncture,” said Mitra.

He added that in case of a shortfall, it is the responsibility of the Centre to garner resources for fully compensating states, based on the formula agreed upon with states. 
“The Centre must pay compensation from the different cess types, as it is not getting devolved to states… The rate of 14 per cent is also sacrosanct as that was decided by the GST Council,” he wrote in the letter.



Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel