Government gives states two borrowing options

Cash-strapped states could borrow from the Reserve Bank of India (RBI) to cover their shortfall in goods and services tax (GST) collection, with the federal indirect tax body, the GST Council, on Thursday agreeing that states’ revenue losses needed to be compensated.

While the consensus in the Council was that states’ revenue shortfall is to be met, the modalities for doing so witnessed clashes, with opposition-ruled states expressing disappointment about having to borrow from RBI rather than getting an upfront payment from the Centre.

To repay the borrowings, the cess levied on purchases of items such as cars, aerated drinks and tobacco will be extended beyond 2022, when the levy was supposed to expire, according to the current norms.

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Compensation plan

The 41st meeting of the GST Council was stormy, a departure from its normal consensual way of decision-making, as the Centre and state governments wrangled over how the compensation to states needs to be paid.

Economists welcomed the council’s proposals. “This is an unprecedented situation not only for India but also for the rest of the world. There is an economic contraction and revenue position is stressed for both Centre and states. The Council’s suggestion is a fair middle path,” said N.R. Bhanumurthy, vice-chancellor of Dr B.R. Ambedkar School of Economics in Bengaluru.

The Centre drew a distinction between what is payable to states as compensation due to the implementation of the indirect tax reform in 2017 and the revenue loss on account of the pandemic. States such as Delhi, Punjab and Kerala opposed the move.

Union finance minister Nirmala Sitharaman, who chaired the council meeting, told reporters that the pandemic was an act of god and the ‘hardwired’ law on GST compensation to states did not foresee this situation. States now have a week to choose between the two options offered to them.

In the first option, states can borrow 97,000 crore, which finance secretary Ajay Bhushan Pandey said was this fiscal’s revenue shortfall that can be attributed to the implementation of GST in 2017, from RBI.

The second is to let states borrow from RBI the entire 2.35 trillion, which states said they need to be paid as compensation in FY21. This includes revenue lost due to the pandemic and the national lockdown.

Sitharaman said the Centre could talk to RBI so that all states can borrow at the same rate.

Pandey said the compensation requirement was around 3 trillion this year, of which 65,000 crore will be collected by way of GST cess.

Senior Congress leader and Punjab finance minister Manpreet Singh Badal told reporters after the meeting that “it was not in the best of spirit.” Badal said the solution has been thrust on states. “We are not happy with the outcome, but we do not have a choice,” said Badal. Chhattisgarh finance minister T.S. Singh Deo alleged states were being arm-twisted. Kerala finance minister Thomas Isaac said in a tweet that introducing a distinction between the revenue shortfall caused by the implementation of GST and that by covid-19 and that the latter doesn’t need to be compensated fully is not constitutionally valid.

Anuja and Pretika Khanna contributed to the story .

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