Oppn-ruled states dismiss Centre's 2 options on GST compensation shortfall

This comes a day after the finance ministry officially communicated the finer details of the two borrowing options to states to make up for the compensation shortfall
Rejecting both options proposed by the Centre to make up for the goods and services tax (GST) compensation shortfall, Opposition-ruled states, including West Bengal, Punjab, Chhattisgarh, and Kerala, will meet on Monday over a videoconference to thrash out the future course of action. Operationalising the Centre-states dispute resolution mechanism may be discussed as part of the future strategy.

This comes a day after the finance ministry officially communicated the finer details of the two borrowing options to states to make up for the compensation shortfall.

The first option is to only borrow up to Rs 97,000 crore, which is a shortfall arising out of GST implementation via a special window by the Reserve Bank of India or the entire Rs 2.35 trillion, which accounts for the Covid-19 pandemic through issue of market debt. The interest component will be repaid via compensation cess collection and the fiscal headroom will be hiked by an additional 0.5 percentage points.

However, under the second option, the interest burden will have to be borne by states and no additional fiscal headroom has been provided.

Kerala Finance Minister Thomas Isaac said the state rejected both options. “Both options are bizarre. Under the first option, I don’t accept the bifurcation of compensation into Covid and non-Covid. Even the Attorney General has not made this distinction. Under the second option, why can’t the interest component be repaid using the cess collection?” asked Isaac.

He also pointed out that it was incorrect to allocate the fiscal deficit ceiling in a universal manner as the compensation requirements of states varied widely. “The more serious problem is, how do you allocate the same fiscal deficit ceiling to Kerala, Telangana or the Northeast?” he asked. He pressed for borrowing by the Centre as the solution.

Punjab Finance Minister Manpreet Singh Badal told Business Standard that it rejected both options and all Congress and other Opposition-ruled states will do a wider consultation on the issue. “Both options don’t seem attractive to us. They are not increasing the fiscal deficit ceiling in the second option and also placing the entire interest burden on states. The Centre is running away from its commitment,” said Badal.

West Bengal Finance Minister Amit Mitra said on Sunday, “In the name of act of God, a huge debt is thrust on states. States finances will lose their health. That will lead to crushing federalism.”

The states are guaranteed full compensation for the first five years of the GST roll-out if they do not record 14 per cent growth in revenue from GST on a base year of 2015-16.

States have not got a rupee of compensation during the current fiscal year so far against the requirement of Rs 1.5 trillion for the first four months.

States also rejected the argument that while additional borrowing by the Centre influences yields on central government securities and has other macroeconomic repercussions, yields on state securities do not directly influence other yields and do not have the same repercussions.


“How do you allocate the same fiscal deficit ceiling to Kerala, Telangana or the Northeast?”

THOMAS ISAAC, Kerala finance minister

“In the name of act of God, a huge debt is thrust on states. That will lead to crushing federalism”

AMIT MITRA, West Bengal finance minister

“Both options don’t seem attractive to us. The Centre is running away from its commitment”

MANPREET SINGH BADAL, Punjab finance minister

“The states’ borrowing won’t impact yields — this is the first time I have heard this. Imagine if all states go to the market. Impact on yield is dependent on combined state and central fiscal deficit. This is the most dangerous falsehood spread by the Centre,” added Mitra.

Mitra said 90 per cent of states at the last GST Council meeting were of the view that the Centre must borrow. “We will put our heads together before the GST Council meeting,” he said.

Fifteen states, including several Bharatiya Janata Party states, stood up at the GST Council meeting and said the Centre should do the borrowing, pointed out Mitra.

West Bengal’s shortfall is around Rs 15,000 crore.

Mitra added that on March 14, Infosys Chairman Nandan Nilekani had made a presentation on behalf of the GST Network before the GST Council, and the total tax evasion under GST was said to be at Rs 70,018 crore.

Bihar Deputy Chief Minister Sushil Kumar Modi, however, rooted for the first option of only borrowing Rs 97,000 crore via a special window as it will take care of the interest component, besides getting a 0.5 percentage points additional Fiscal Responsibility and Budget Management limit. “The Centre has said it is committed to the entire amount. The rest is being deferred by two years. The option of interest subvention is also there. You can raise more money. We feel the first option will be the best for states. But our officers will discuss the options threadbare,” said Modi.

Chhattisgarh Finance Minister T S Singh Deo had said on Thursday that states were being arm-twisted in order to get compensation, which was rightly due to them according to the Constitution of India. He had urged the Centre to borrow instead of the 31 states and Union Territories doing that separately.

Delhi Finance Minister Manish Sisodia had called the options laid before the Council on Thursday the biggest betrayal in the name of federalism.

The GST Council met on Thursday to deliberate on a single agenda of compensating states in view of muted compensation cess collections. The Centre also took the opinion of Attorney General K K Venugopal on the issue.

The governments, both the Centre and the states, have collected Rs 21,747 crore from the compensation cess in the first four months of the current fiscal year, which was one-third less than Rs 32,796 crore mopped up in the corresponding period of 2019-20.

In fact, the collections were muted last fiscal year as well. The collection was Rs 95,000 crore, but the states were given Rs 1.65 trillion after dipping into the excess collections from the cess of the previous years.

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