No consensus on GST compensation, Union govt ready to enable 21 states to borrow

FM Sitharaman said that states that are open to borrowing under the first option can approach the Union government, which is willing to facilitate the same.
FM Nirmala Sitharaman at GST Council meeting
FM Nirmala Sitharaman at GST Council meeting

The stalemate between the Union government and states continued on Monday over the borrowing options put forth to states to meet the GST revenue shortfall. Addressing the media post the meeting, Finance Minister Nirmala Sitharaman argued that states that have agreed to a borrowing option cannot be held back in the absence of a consensus.

“It is the state’s right to decide what it wants to do,” the FM said.

FM Sitharaman suggested that states that are open to borrowing under the first option can approach the Union government, which is willing to facilitate the same.

So far, 21 states have opted for option 1, while some states haven’t chosen any option and have argued that the Union government should be the one borrowing.

The FM also reiterated that borrowing by the Centre will have a larger impact on the market. She said that the Centre has already issued a borrowing calendar and borrowing beyond that would push up the G-Sec rates, making borrowing costs higher for states and the private sector.

Government securities (or G-Secs), which are used as a benchmark for other borrowings, are short- and long-term bonds issued by the Union government to raise funds to meet its expenses at a specific interest rate that is payable at a certain frequency (bi-annually, annually, etc).

Economic Affairs Secretary Tarun Bajaj too, argued the same. “The strain of the Centre borrowing will have a greater bearing on the macros… Let’s not expand central fiscal deficit beyond a point,” he said during the press briefing.

Addressing the media on Monday, Tarun explained that the Union government and the Reserve Bank of India (RBI) will work with the states to borrow from the market at minimum rates and that the interest rate will be much lesser than what some states expect it to be.

“When states come to us, we will work with them, calculate the estimated shortfall each state would face and what compensation becomes available and work out the borrowing based on these. It will be our effort to ensure states get a good rate. Resources of states and Centre are intact, the entire interest will be paid back from the compensation cess that we will collect beyond July 22,” Tarun said.

He added that the money will not be going out of the pocket of the states, but that a separate pocket is being used to pay back these amounts.

However, post the GST Council meeting, Kerala Finance Minister Thomas Isaac said that Nirmala Sitharaman permitting 21 states to borrow as per option one is illegal. "Option one involves deferment of compensation payment beyond 5 years for which a Council decision is necessary as per AG’s opinion. No such decision has been made in the Council," he said in a tweet.

"It is unfortunate that Union FM does not propose a decision in the Council or even make a statement what she is going to do but choose to make the announcement in the press conference. Why does Centre refuse to take a decision in Council? Total disregard for democratic norms," he added.

GST compensation issue

As per the GST Act, the Union government has to pay compensation for any shortfall in GST collection for the first five years since the implementation of GST, which is up to June 2022.

However, this year, the Union government has not paid the entire GST compensation due to states, citing the coronavirus-induced economic slowdown. In August, the Union government presented states with two borrowing options to meet the GST compensation shortfall.

The first option was borrowing only the GST revenue shortfall of Rs 97,000 crore at a reasonable rate of interest in consultation with the RBI through a special window offered by the Centre. This figure was arrived at assuming that compared to last year’s GST collection, 10% more would be the GST collection in a normal situation.

The second option was that states could borrow the GST revenue shortfall and shortfall arising due to the COVID-19 pandemic. This would amount to Rs 2,35,000 crore.

In the 42nd GST Council meeting on October 5, no decision was arrived at regarding the borrowing options and Kerala Finance Minister Thomas Isaac tweeted post the meeting that 10 states had demanded that full compensation should be paid to the states during the current year as per clauses in the law and that the Centre should borrow.

It was, however, decided to extend the levy of GST compensation cess beyond 2022 by two more years.

FM Nirmala Sitharaman had also said during the previous GST Council briefing that it would be disbursing GST compensation cess collected so far this year of Rs 20,000 crore to the state government.

The 21 states/UTs that opted for the first option on GST compensation 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.

Watch to know what GST compensation is and why it is important to states

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