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.

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