GST Council cannot stop 21 states from borrowing against future cess receipts

As the GST Council on Monday extended the levy of compensation cess beyond June 2022 for such period as may be required to meet the revenue gap, individual states can now monetise it with the help of the Reserve Bank of India and the department of expenditure, even without the Council’s approval

Dissenting Goods and Services Tax Council members cannot stop 21 states from borrowing against their respective future compensation cess proceeds, and their borrowing plan will kick-off even if there is no unanimity at the council’s meeting on October 12, two people with direct knowledge of the matter said.

It is the Constitutional obligation to compensate states for a period of five years and to ensure that the GST Council extended the levy beyond June 2020. (PTI File)

According to the Attorney General of India’s legal opinion on this matter, a state can borrow even on the strength of future receipts from the compensation fund. As the GST Council on Monday extended the levy of compensation cess beyond June 2022 for such period as may be required to meet the revenue gap, individual states can now monetise it with the help of the Reserve Bank of India and the department of expenditure (DoE), even without the Council’s approval, they said, requesting anonymity.

The GST Council meeting on Monday deferred a decision on compensating states for the shortfall in their share of the indirect tax revenue by a week after states governed by opposition parties insisted that the Centre must borrow the entire Rs 2.35 lakh crore deficit and reimburse them.

The Centre had placed two options before the states—borrow Rs 97,000 crore (the amount was raised to Rs 1.10 lakh crore on Monday) to bridge the shortfall in revenue from GST, equal to the shortfall resulting from issues related to its implementation, without repaying either principal or interest, or alternatively, borrow the entire Rs 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 Rs 1.10 lakh crore to repay the funds that would come out of the cess, states like Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana and West Bengal, rejected both the options. They instead proposed a third option—the Centre should borrow the entire shortfall, compensate states in full and retire the debt from the compensation cess fund.

“It is unlikely that the ten [dissenting] states will agree to the Centre’s preposition at the GST Council’s meeting on October 12 unless the central government comes forward and share the burden,” said the finance minister of a state ruled by a non-BJP party who did not wish to be named.

West Bengal finance minister Amit Mitra said the Centre’s arguments that borrowing would have adverse macro-economic consequences is untenable. “Why, borrowing by cash-strapped states would not have macro-economic consequences?” he said.

“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 are facing acute financial crunch and the Centre should help them to come out of this difficult situation.

In fact, the third option is more practical as the Centre is 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 to thrust huge loan burden on them would be constrained to seek division of vote on October 12 if the Central government insists on its two options.

One of the persons mentioned above said, “The 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 which 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, the Union government’s intervention is required for borrowings from 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 it is the Constitutional obligation to compensate states for a period of five years 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.