Accusing the BJP-led Union government of abdicating its responsibility, Telangana Chief Minister K Chandrasekhar Rao on Tuesday wrote to Prime Minister Narendra Modi, asking him to reverse his government’s decision on Goods and Services Tax (GST) compensation and suggested that the Centre should instead borrow the shortfall amount.
He has also alleged that the Centre has violated the provisions of the GST Compensation Act by parking the surplus of the compensation fund in its Consolidated Fund instead of parking them in the non-lapsable Compensation Fund in the Public Account, and using the surplus for meeting its expenditure in the years 2017-18 and 2018-19.
In the GST council meeting held on August 27, the Centre expressed its inability to pay the GST compensation to states and offered two borrowing options. In the first option, states can either borrow the full compensation deficit of Rs 2.35 lakh crore from the markets, facilitated by the Centre and the Reserve Bank of India, or the shortfall that’s purely due to GST implementation of Rs 97,000 crore through a special window facilitated by the RBI.
Stating that the Centre is denying the legal rights of the states, KCR said, “The argument put forth that the additional borrowings by the Centre influences yields on Central government securities and has other macro-economic repercussions is not very convincing. The borrowings by the Centre as well as the States are from the same financial system and pool of investors and their impact on the macro- economic situation is not very different. Borrowings by the States will also push up the yields on government securities.”
Further, puncturing the justification given by the Union Finance Minister that the GST revenue shortfall was an “Act of God,” KCR said, “An artificial distinction is being made between the loss of revenue on account of GST implementation and the impact of Covid. Such a distinction is not provided for in the Act. Thus, statutory provisions for GST compensation has no meaning, if Gol does it honour it is litter spirit.”
According to Telangana Finance Minister Harish Rao, Telangana suffered a loss of Rs 8,000 crore due to the pandemic.
KCR too, said that the state suffered a revenue loss of 83% in April 2020 whereas Covid-19 pandemic related expenditure has increased and is faced with the difficult task of meeting the expenditure through front loading of market borrowings.
“With broad fiscal policy being controlled by the Government of India, States are made to depend on the Union Government even to go for market borrowings. Prescribed 3.5% FD for Gol whereas states are restricted to 3% in against the federal spirit to the constitution,” KCR said.
KCR put forth four ‘irrefutable’ points justifying his demand seeking the Centre to reconsider its decision.
1. The States have yielded more fiscal space to facilitate the introduction of GST. He said that GST has subsumed over 47% of the gross tax revenue of the states as compared to only 31% of the Centre's. “With the introduction of GST, States are left with no major buoyant taxes of their own, while the Centre is still left with buoyant sources like income tax, corporation tax and customs duties. In addition, the Centre has access to more non-tax revenues such as dividends from the RBI, Central Public Sector Undertakings, etc. Thus, the Centre is endowed with more resources to help the States. In a situation such as Covid pandemic, the Centre instead of extending a helping hand, is denying the States, their legally rightful claims. The options given to the States to borrow, to meet the shortfall in compensation cess, are not in accordance with the Act. Linking these options to additional borrowings allowed under Aatmanirbhar package is only to deny the states the full benefit of the package,” he wrote.
2. The expectation of the States that with the introduction of GST, the share of cesses and surcharges, which are not shareable with states, will come down has been totally belied. The Centre has resorted to levy of cesses on imported goods and increased the cess on petrol and diesel by Rs.13 per litre. The estimated additional revenue from the increase in the cess on petroleum products alone is over Rs. 2 lakh crore per annum. This has pre-empted the states from increasing the VAT on petroleum products.
3. States are in the forefront of fighting COVID and reviving the stalled economic activities and hence need more resources than the Centre.
4. KCR has also alleged that the Centre is abdicating its responsibility of fully compensating states by taking recourse to legal opinion. “The Centre has violated the provisions of the GST Compensation Act by parking the surplus in the Compensation Fund in its Consolidated Fund instead of parking them in the non-lapsable Compensation Fund in the Public Account and using the surplus for meeting its expenditure in the years 2017-18 and 2018-19. Now that there is a deficit, States are being asked to borrow,” he wrote.