Centre absolves itself of any responsibility to compensate states for GST shortfall, tells them to borrow from RBI

The Centre on Thursday washed its hands off its commitment to compensate the states for the revenue shortfall in the Goods and Services Tax, telling them to borrow from the market or the Reserve Bank of India (RBI).

The tax collections have slumped largely because the markets are closed on account of the Covid-19 pandemic.
Under the law that governs GST, states have been guaranteed payment for loss of revenue in the first five years since the tax regime came into force on July 1, 2017. This means states have been promised compensation for any revenue shortfall till 2022 - if they fell below 14 per cent annual growth since July 2017.

Finance Minister Nirmala Sitharaman, who chaired the GST Council meeting through video-conferencing, described the coronavirus pandemic was "an act of God" and an unforeseen factor that had affected GST collections." She has given the states two options. "Two options were placed before the states. We told them that we will facilitate talks with the RBI and help them get G-security linked interest rates, so that each state does not have to struggle to raise a loan."

She said since both choices involve borrowing by the states, the RBI is a better option.
The states requested a 7-day window to think matters over and get back to the finance ministry, since whatever they borrow will have to be repaid after five years, instead of the Centre meeting its commitment of compensating the states for five years for their loss of revenue from abolition of all state taxes. They were accordingly asked to send suggestions in a note.

The Congress-ruled states and those run by parties other than the BJP have said the Centre has a statutory obligation to pay GST dues to them. It has been pointed out that "withholding" of GST dues was a "sovereign default" and going back on constitutional guarantees, which had been the reason the states had come on board with the GST plan in the first place.

The Centre has, however, claimed it has no such obligation if there is a shortfall in tax collections.

Union Finance Secretary A. B. Pandey explained that the first option given to the states is a special borrowing facility, in consultation with the RBI, to provide Rs 97,000 crores at a "reasonable" interest rate. The other option is to meet the entire GST compensation gap of Rs 2.35 lakh crore this year itself, after consulting the RBI. Pandey said these options are for only the current year, as the situation would be reviewed next year and a decision taken on what is best for the country.

He said the Centre had consulted the Attorney General, who was firm that the compensation to the states has to be met from the GST collection and not from the Consolidated Fund of India. About Rs 3 lakh crore would be needed for paying compensation to the states while the compensation cess on GST collected would be only Rs 65,000 crores. The attorney general said there is an option to borrow the balance Rs 2.35 crore from the market. Pandey said the April-July compensation alone works out to around Rs 1.50 lakh crore.

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Free Press Journal