An extended session of the 42nd meeting of the Goods and Services Tax (GST) Council on Monday could not arrive at a consensus on the vexed issue of making good the states’ GST revenue shortfall in FY21. While as many as 21 states that have agreed to borrow under a special Option 1 window wanted to fast-track the process and meet their expenditure commitments, another 10 states stuck to their view that the full compensation amount will have to be paid in the current year itself with the Centre itself borrowing the shortfall amount.

The dissenting states are evaluating options before them, including approaching the Supreme Court for a resolution.
While the Centre has virtually ruled out that it would borrow from the market, it has kept its doors open to the dissenting states for further discussions.

The Centre, on its part, also reiterated that it is committed to ensure that so long as the states opt for borrowing under any of the two options it put forth, they don’t have to bear the interest or principal repayment costs, and that the repayments would be fully adjusted against future collections of the cess.

Addressing the media, finance minister Nirmala Sitharaman stressed that borrowing by the Centre — which has already raised its gross borrowing ceiling for FY21 by 54% to Rs 12 lakh crore — could jack up the G-sec yields immediately, causing an additional overall public debt burden and also constraints for the corporate sector, at a time they need to spend to revive businesses.

Economic affairs secretary Tarun Bajaj pointed out that since the borrowings for the GST compensation requirement is likely for a short tenure of two years or so and given that the special window will allow states to raise funds at costs close to the G-sec rates, the apprehensions of the dissenting states of a cost arising from the options presented by the Centre are unfounded.

There is no need to compare the rate of borrowing with 10-year G-sec yield. The two-year borrowing rate for the Centre is sub-5% and the borrowing rate for the Centre for 5 years is sub-6%. It will be much lower than expectations of some people as tenure of loan would be much shorter,” Bajaj added.

The Centre had earlier estimated the states’ total GST revenue shortfall in the current financial year at Rs 3 lakh crore and that some `65,000 crore would accrue from the compensation cess. This indicated a total shortfall — including those caused by the GST implementation itself and the pandemic — of Rs 2.35 lakh crore.

However, some states have said in Monday’s council meeting that the total shortfall would be lower at Rs 1.85 lakh crore. Given that the Centre has already raised the borrowing limit for states under the incentivised Option 1 at Rs 1.1 lakh crore from Rs 97,000 crore estimated earlier, the Centre could borrow the entire Rs 2.85 lakh crore, they suggested.

The Council had earlier decided to extend the applicability of ‘compensation cess’ on specified ‘luxury and demerit foods like cars, tobacco items and aerated drinks beyond the current date of June 2022, for such period as may be required to meet the revenue gap. This is to service the planned debt and also raise the supplementary funds required for bridging the states’ yawning revenue shortfall.

Sitharaman stressed during her concluding speech during the Council deliberations, in which all states spoke, that the dissenting states could not stop those who wish to exercise the Option 1 from going ahead. This is even as she appreciated that Article 293 of the Constitution clearly spells out the borrowing freedom for states.

Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, West Bengal and Chhatisgarh are the states not on board with the Centre’s proposal. Stating that the Centre can’t split the compensation into two parts, Punjab finance minister Manpreet Badal argued the Central government should borrow and credit the amount to the Compensation Fund for it to be compensation.

The Attorney General of India opined that compensation must be paid within the five years of transition period and cannot be delayed beyond these five years, he pointed out.

Kerala finance minister Isaac Thomas tweeted: “Union FM’s announcement that she is going to permit 21 states to borrow as per Option one is illegal. Option one involves deferment of compensation payment beyond 5 years for which a Council decision is necessary as per AG’s opinion. No such decision has been made in the Council.”

The minutes of the 8th GST Council quotes the then Union finance minister as saying , “….Compensation to the States shall be paid for 5 years in full within the stipulated period of 5 years and, in case the amount in the GST compensation fund falls short of the compensation payable in any bi-monthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years”.

Last week, the Reserve Bank of India decided to purchase state government bonds in the secondary market via open market operations (OMOs), in a move aimed at curbing states’ borrowing costs. According to rating agency Icra, state governments’ combined gross market borrowings may rise by 63% to about Rs 10.3 lakh crore in FY21 and net borrowings by 81% to Rs 9 lakh crore (4.77% of G-SDP).

Bihar deputy chief minister Sushil Modi said most of the 21 states have already written to the finance minister to expedite the process of borrowing as funds are needed urgently. Sources said while states opposed to the proposal didn’t demand voting on the issue, some of the demands like setting up of group of ministers or putting together a dispute resolution mechanism were not considered as the issue of borrowing for states doesn’t come under the Council’s domain

Source : Financial Express