Centre blinks in tussle with states over GST compensation, but questions remain
November 30, 2020
The Rs 6,000 crore first tranche for some of the states is just a drop in the ocean. The Centre is resisting demands from states to take loans from the market. — Anilesh S. Mahajan
Even as the opposition-ruled states prepare to take on the finance ministry over the GST compensation, the first tranche of Rs 6,000 crore was transferred to 16 states and two Unions territories (UTs) by the Centre on October 23. The exchequer borrowed from the market and transferred to the states as part of the special borrowing window to address the shortfall of GST collections in fiscal 2020-21. The ministry said it would make regular weekly transfers to the states who are onboard with the central plan for compensation on the Rs 1.1 lakh crore shortfall (out of the Rs 2.35 lakh GST compensation dues).
This is still a “half-step forward”, as the finance ministers in some of the opposition-ruled states—such as T.S. Deo of Chhattisgarh, Manpreet Badal of Punjab, Thomas Isaac of Kerala, Amit Mitra of West Bengal, T. Harish Rao of Telangana and Manish Sisodia of Delhi—argued that the Centre should borrow the entire amount and make it available to the states, else form a group of ministers to discuss how much more debt can be taken without impacting the economy. Kerala, along with the other opposition ruled states, was also planning to take the legal route to sue the Centre for not releasing the GST dues.
The 10 Opposition-ruled states had rejected both borrowing options offered by finance minister Nirmala Sitharaman at the August 27 GST Council meetingthe states could either borrow up to Rs 97,000 crore, which is the projected shortfall arising out of the GST implementation, under a special window facilitated by the RBI; or borrow the entire Rs 2.35 lakh crore through issue of market debt. These options faced a backlash from not only the Opposition-ruled states, but also from the BJP-governed ones. Isaac had earlier said that Kerala is considering moving the dispute resolution mechanism within the GST council.
The states are saying that the Centre is reneging on its pledge to compensate them for the losses GST has brought. In 2017, the states had foregone their rights to levy indirect taxes on goods & services and agreed to amalgmate 17 taxes so as to make a unified GST, with a promise that the Centre would compensate the states whose revenues are hit. The Centre also levied a cess to fund the compensation. But with Covid and the subsequent lockdown, not only did GST collections take a hit, it led to a shortfall in cess collection. The states, especially those ruled by the opposition, are mounting pressure on the exchequer to compensate on the dotted line.
Meanwhile, the first tranche was released to 16 states and two UTs, out of the 21 states that opted for the borrowing scheme. This includes Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Meghalaya, Odisha, Tamil Nadu, Tripura, Uttar Pradesh, Uttarakhand and the UTs, Delhi and J&K. Five states did not have any shortfall on account of GST compensation. Maharashtra broke from the opposition ranks to opt for the deal.
The part resolution was possible only because the finance ministry eased up from its previous position, where the officials were building the case that the Centre was only liable for Rs 97,000 crore of additional payments. Explaining the climbdown, a top finance ministry official told indiatoday.in that the Centre has decided to take on the debt to extend back-to-back borrowings for administrative ease, as this would allow the states access to debt at a uniform rate. Moreover, the Reserve Bank of India (RBI) was also more comfortable dealing with the Centre, rather than with individual states. While the RBI is the banker for all states, it doesn’t invest in state government debt either in primary issues or in the secondary market.
The Centre’s borrowings will not impact its fiscal calculations, as it would factor these as capital receipts, but it will enter the state’s books as their debt. But since the Centre is going to the market to borrow the money, the debt is not only cheaper but also easier to raise. The loan is at an interest rate of 5.19 per cent, with a commitment of repayment broadly in three to five years. The Centre has already extended the tenure of levy of cess beyond 2022 to clear all unmet compensation dues of states. The finance ministry doesn’t want to stretch the exchequer further, as they have already breached this fiscal’s gross borrowing by 54 per cent to Rs 12 lakh crore, and more debt would mean hiking G-Sec yields (G-sec is the debt instrument used by the sovereign to raise funds from the public). More debt would also mean making credit for the public sector and private enterprises expensive.
States still want more clarity on the payment of the cess dues, revenue shortfalls and leeway to explore more options for cheaper and easier capital. They argue that they have given up their rights to levy indirect tax, and GST continues to be 70-80 per cent of their revenues. One of the state finance ministers, on condition of anonymity, said that the Centre needs to explore more options, as the expenditure from the state will also lead to the recovery of the economy at a much greater speed. qq