At GST Council meet, non-BJP states to oppose Centre’s funding options

Centre which had proposed states to either to borrow the compensation amount arising from the implementation of GST (₹97,000 crore) or the entire shortfall (₹2.35 lakh crore) may re-negotiate terms at the meeting

The Centre and Opposition-ruled states have serious differences over the financing of the GST shortfall of ₹2.35 lakh crore in the current fiscal. Photo: iStock

The GST Council meeting on Monday (October 5) may witness a stormy debate with several non-BJP states likely to demand an alternative to the Centre’s borrowing options for funding the GST compensation deficit.

The meeting is vital as many states which require fund to meet their expenditure for the second half of the fiscal year, will demand the Centre to reimburse the entire shortfall of ₹2.35 lakh crore in their share of GST revenue.

Related news: GST cess retention temporary, not diversion: FM rebuts CAG

Union Finance Minister Nirmala Sitharaman during the GST Council meeting on August 27 gave states two options – to borrow the compensation amount arising from the implementation of GST (₹97,000 crore) or the entire shortfall (₹2.35 lakh crore). States which choose the first will be spared of bearing the interest and principal amount which will come from tax levied on luxury products like liquor, cigarette and automobiles. Those who opt for the second option will have to bear the interest burden.

While 21 BJP-ruled states and those supporting the government have opted for Option 1, non-BJP-ruled states like West Bengal, Punjab and Kerala have not accepted either of the options.

While the non-BJP states feel the constitutional liability of compensating states lies with the Union government, chief ministers of West Bengal, Kerala, Delhi, Telangana, Chhattisgarh and Tamil Nadu have already written to the government opposing the options given to them.

While these states want the Centre to borrow to meet the shortfall, the Centre has argued that the revenue accruing from GST compensation cess goes to the states and the Centre cannot borrow on the security of the tax it does not own.

Taxes under the GST structure, are levied under 5, 12, 18 and 28 per cent slabs. In the highest tax slab, an additional cess is levied on luxury, sin and demerit goods and proceeds from the same are used to compensate states for any revenue loss.

Related news: CAG says Centre violated laws, used GST compensation funds for other purposes

Quoting GST laws, Attorney General of India KK Venugopal has said that Centre is not legally obliged to compensate for the loss of revenue by states and the GST Council should work out a way to reimburse the states.

Meanwhile, some of the 21 states have urged the government to expedite the borrowing process and to extend the levy of compensation cess beyond the five-year transition period ending June 2022.

Bihar’s Deputy Chief Minister Sushil Kumar Modi wrote to Sitharaman on Saturday, urging her to kick-start the compensation process for states who have picked their option.

“With GST revenue turning negative and the compensation having been delayed, I need not impress upon you the fact that all the states are in urgent need of funds. We will very soon be entering the second half of the current fiscal year and all of us need to do a lot of catching up on the activities planned for the current year and which have been on hold due to lack of sufficient funds…availability of funds, even if the same are in the form of debts, will enable cash-strapped states to once again kick start the development process which has come to a halt in the face of the ongoing pandemic,” he wrote.

It is speculated that the 42nd GST Council meeting may see the Centre renegotiate terms of the borrowing options with the states.


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