The compensation cess is derived from taxes on sin and luxury goods such as tobacco, cars and aerated drinks.(PTI)
The compensation cess is derived from taxes on sin and luxury goods such as tobacco, cars and aerated drinks.(PTI)

GST row: Most states likely to opt for borrowing Rs 97k crore

An acceptance by states, which is likely to be confirmed to the Union finance ministry soon, will put an end to the controversy surrounding the GST compensation payments.
Hindustan Times, New Delhi | By Chetan Chauhan
UPDATED ON SEP 09, 2020 01:14 AM IST

With the Centre clarifying that the only option available to states to receive the GST compensation is for them to borrow, most states, including some ruled by non-BJP parties, are likely to opt for the first of the two options offered at the recent Goods and Services Tax (GST) Council meeting.

Their acceptance, which is likely to be confirmed to the Union finance ministry soon, will put an end to the controversy surrounding the compensation payments.

The Centre, at the GST council meeting on August 27, gave two option to the states even as it admitted to a total shortfall of Rs 2.35 lakh crore. One, to borrow the projected GST shortfall of Rs 97,000 crore from a special window of the Reserve Bank of India, with both the principal and the interest coming from the compensation cess fund — along with Fiscal Regulatory and Budget Management (FRBM) relaxation of 0.5 percentage point.

Or to borrow the entire projected shortfall of Rs 2.35 lakh crore – both on account of losses arising from implementation of GST and that arising from the Covid-19 pandemic. States have to bear the interest cost in this case.

To be sure, the finance ministry has said it is committed to paying the total compensation — only, states will have to wait for the bit arising from Covid-19 till the compensation cess fund is extended.

Also read: GST compensation to states a legal obligation, Ashok Gehlot tells PM Modi

The compensation cess is derived from taxes on sin and luxury goods such as tobacco, cars and aerated drinks.

Under The GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22). The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16. The council is also working on extending the 2022 deadline for another five years.

At the GST council meeting, at least five states — Kerala, Punjab, West Bengal, Puducherry and Delhi — voiced their concerns over the proposals. They wanted the Centre to borrow and pay the GST shortfall to the states, a suggestion that was rejected by the Centre.

“We have to take what is on the table,” said a Kerala finance department official. “While noting our dissent to the options, we may opt for the first option as it has lesser burden on the state finances. Everything is under discussion.”

Also read: ‘GST means economic apocalypse’: Rahul Gandhi’s latest jibe at govt over economy in new video

Kerala finance minister, Thomas Issac, who tested Covid positive on Sunday, was one of the first ones to oppose the options, and accused the Centre of going back on its commitment.

An official from Maharashtra, another state which opposed the Centre’s options, said it may also go for the first option. “What other option we have?” the official asked, adding that without GST revenue, the state would not be able to pay salaries to its employees and fund various anti-Covid programmes.

Manoj Saunik, Maharashtra’s additional chief secretary, finance, said: “We are weighing the options. It will be finalised and conveyed to the Centre in a day or two.”

Rajasthan chief minister Ashok Gehlot on Monday wrote to Prime Minister Narendra Modi opposing the two options saying they were in violation of the GST (Compensation to States) Act, 2017 and said applying 10% (nominal) growth to project a higher revenue loss due to Covid is “statistically untenable” and “factually unsound”, a year after the actual growth was just 4.2%. Nominal growth in 219-20 was 7.2%.

“It is the obligation of the Central Government to ensure that the states receive, without liability, the full amount of compensation, notwithstanding the shortfall in the collection of cess and that the compensation can neither be increased nor decreased without amending this Act,” he wrote.

He also said that late Arun Jaitley , finance minister at the time GST was launched, had stated that the GST Council could consider raising additional resources including through borrowing but it was never the understanding that the states would borrow this additional amount. “The Council does not have the power to alter the compensation mechanism without getting the Act amended,” he wrote.

The Haryana government has decided to go for option 1 as the borrowing will be over and above any other borrowing ceilings eligible notified by the department of expenditure. The special window will not be treated as debt of the state for any norms prescribed by the Finance Commission, a Haryana official said.

“The first charge on the GST compensation cess each year will be the interest payable. The second charge will be the principal repayment. The remaining arrears of compensation accrued during the transition period will be paid after the interest and principal are paid,’’ added this official, speaking on condition of anonymity.

A Madhya Pradesh finance department official said the state would go for option 1 . Bihar has already communicated to the Union finance ministry that it has chosen option 1.

“We have given in writing to the union finance ministry that Bihar will go with option one,” said deputy chief minister cum finance minister Sushil Kumar Modi.

Sowjanya (who goes by just one name), secretary, Uttarakhand finance department, said that the state government has not taken a final decision on the matter and will respond to Central government soon.

(With inputs from state bureau)

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