E-Paper
GST dispute: 21 states may have legal route
Goods and Services Tax (GST) Council members that don’t want to borrow from the market to reduce the shortfall in their share of the indirect tax revenue this financial year cannot stop the 21 states that have decided to do so from going ahead even if no consensus is reached on the matter at an October 12 meeting.
Goods and Services Tax (GST) Council members that don’t want to borrow from the market to reduce the shortfall in their share of the indirect tax revenue this financial year cannot stop the 21 states that have decided to do so from going ahead even if no consensus is reached on the matter at an October 12 meeting, two people with direct knowledge of the matter said.
According to the Attorney General of India’s legal opinion, a state can borrow even against future receipts from the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, coal and tobacco products, and automobiles, the two people said on condition of anonymity.
After the GST Council on Monday extended the levy of compensation cess beyond June 2022, the original deadline for it to be phased out, until as long as it takes to close the revenue gap, individual states can now monetise their deficit with the help of the Reserve Bank of India (RBI) and the department of expenditure (DoE) even without the Council’s approval, the people said.
On Monday, the GST Council headed by the Union finance minister and comprising state finance ministers put off until October 12 a decision on compensating states for an estimated ₹2.35 lakh crore shortfall in their share of GST this fiscal year, as 10 opposition-ruled states balked at the suggestion that they borrow from the market to make up a part of the shortfall. The states demanded the Centre borrow the entire deficit and reimburse them.
The Centre gave the states two options—borrow ₹97,000 crore (raised to ₹1.10 lakh crore on Monday) to bridge the shortfall in revenue from GST, equal to the shortfall resulting from issues related to the tax’s implementation, without repaying either principal or interest; or alternatively, borrow the entire ₹2.35 lakh crore (the remaining deficit caused by the Covid-19 pandemic) and bear significant interest costs.
While 21 state governments opted to borrow ₹1.10 lakh crore, states like Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana and West Bengal, rejected both options. They insisted that the Centre borrow the entire shortfall, compensate states in full and retire the debt from the compensation cess fund. “It is unlikely that the 10 [dissenting] states will agree to the Centre’s proposition at the GST Council’s meeting on October 12 unless the central government comes forward and shares the burden,” said the finance minister of an opposition-ruled states who did not wish to be named.
West Bengal finance minister Amit Mitra said the Centre’s argument that borrowing by it would have adverse macro-economic consequences is untenable. “Why, borrowing by cash-strapped states would not have macro-economic consequences?” he asked.
“The Centre must understand that rating agencies consider the aggregate borrowing [by both the Centre and states] to downgrade... its arguments are erroneous,” he said, adding that states were facing an acute financial crunch and the Centre should help them tide over the situation. In fact, the third option is more practical as the Centre is in a better position to borrow, he said.
“Centre has an institutional mechanism with RBI, we don’t have; it gets loans about 2% cheaper than the market rate and RBI will be saved from dealing with 31 entities [states] rather than one [the Centre],” he added.
The state finance minister quoted above said the 10 states opposing the Centre’s move would be constrained to seek a division of voting on October 12 if the Centre refuses to budge.
One of the persons mentioned above said: “GST Council has jurisdiction to extend the levy of cess to compensate for the shortfall in the compensation. It has done that. Now, the ball rests in the court of individual states, not with the GST Council.”
“When something is not under the jurisdiction of the GST Council, how can any voting or division be permitted on the subject? Voting can occur in GST Council only on those matters which are under the express jurisdiction of the GST Council,” the person added.
Ayush Mehrotra, partner at law firm Khaitan & Co., said: “In terms of the Constitutional framework, Union government’s intervention is required for borrowings from the Consolidated Fund of India and not from the market. However, to ensure that the Union government stands firm on its commitment pertaining to this market-linked borrowing option, the states may require this to be blessed by the GST Council and approved by the Union government.”
Abhishek Jain, tax partner at consulting firm EY India, said the Centre was under a Constitutional obligation to compensate states for a period of five years {starting in July 2017, when GST was implemented} and to ensure that, the GST Council extended the levy beyond June 2020.
“For deficits and other unforeseen situations impacting such collections, various avenues would need to be explored for meeting immediate requirements/handling short-term requirements,” he said.
