Centre 'morally bound' to compensate states under GST: Bihar dy CM

As the GST Council prepares to meet on Thursday to deliberate on the payment of compensation to states facing severe financial stress due to loss of revenue under the indirect tax regime, Bihar deputy chief minister and finance minister Sushil Kumar Modi said on Tuesday that the Centre is “morally bound” to make the payment.

If needed, the government should borrow more to compensate the states, he said.

The Centre has not paid the compensation to states for the four months ending July this fiscal year as the collection of compensation cess nosedived due to the economic crisis  caused by the COVID-19 pandemic.

There may be no legal binding on the Centre to make the payment, but it is “morally bound to do so,” Modi said while taking part in an event organised by The Indian Express.

“State finances are under stress. We are able to pay only salaries, wages and pensions. We are heavily dependent on the Centre as 76 per cent of our revenue comes from the Centre,” he said, adding since the states cannot borrow, the Centre should and pay the states.

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The meeting on Thursday is intended to resolve the differences between the states and the Centre on compensation payment under the GST and may dwell upon alternative mechanisms. It is also likely to consider bringing more goods under the compensation cess, increasing the cess on current items covered, and increasing the period of the cess from the current five years that ends in 2022.

The Centre had sought the opinion of the attorney general on ways to compensate the states. The A-G told the Centre that one option could be to allow states to borrow against future compensation receipts. The states are, however, not enthused with this idea.

Sushil Modi, who is also the head of many GST ministerial panels, had earlier said that borrowing would increase the fiscal deficit of states by 1-1.5 percentage points.

The attorney general had also said that the Centre doesn’t have any legal obligation to pay the states.

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It is now for the Centre to take a final call on the vexing matter that has been a contention since the GST was implemented on July 1, 2017.

The GST Council is scheduled to meet again on September 19.