GST row: Centre unlikely to borrow, as suggested by states

Sources say states can’t complain they don’t have funds as they parked money in T-bills

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 Union Finance Ministry is unlikely to accept the demand of states that the Centre borrow in order to meet the compensation deficit under the Goods and Services regime.

Sources said states had parked about ₹1.8 lakh crore in treasury bills, indicating they were not short of funds.

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. Of this, as per the Centre’s calculation, about ₹97,000 crore is on account of GST implementation and the rest is the impact of coronavirus on states’ revenues.

In the last GST Council meeting, where all non-BJP states rejected the Centre’s proposal, at least four of them wrote to the Centre about an “alternative plan” – the Centre, rather than the states, should borrow to meet the compensation deficit under the GST regime.

Related news: GST second major attack on India’s unorganised economy: Rahul Gandhi

Ahead of the GST Council’s Sept 10 meeting, there were indications that the council would take a call on the borrowing options given by the Centre to meet the compensation gap.

“It is true that states are keeping their options open, just like the Centre, for the coming quarters, they cannot complain they do not have money to spend,” said a government official. The official said states have, on an average, borrowed about 2.75 per cent of their GSDP so far, against 3 per cent of their GSDP.

States have said not all of them had huge funds invested in T-Bills. “The expenditure needs of states also vary. For some, the committed expenditure (salaries, pensions and interest payments) as a percentage of total expenditure is high. Besides, their revenues have badly suffered,” said a state government official.

For Left-held Kerala, the official said, the committed expenditure was as high as 56.4 per cent. “COVID-19 and the lockdown impacted state revenues – with tourism, contributing substantially to the state GDP, taking a huge hit,” said the official.

For BJP-ruled states such as Madhya Pradesh and Karnataka, and even Bihar, where BJP has a coalition government with the JD(U), the committed expenditure as a percentage of total expenditure is only 27.6 per cent, 31.7 per cent and 24.4 per cent, respectively. For them, it is not as bad as it is for Kerala or West Bengal (56.4 per cent and 39.7 per cent, respectively.)

On borrowing by the Centre instead of states, Finance Ministry officials said the compensation cess was a tax owned by states. Under Article 292 of the Constitution, the Centre can borrow on the security of its own taxes and resources, which is the Consolidated Fund of India (CFI), but it cannot borrow on the security of tax which it does not own.

“Compensation cess is actually a resource dedicated to states and only they can borrow on the strength of future flows from cess which will eventually get credited to the consolidated fund of states,” the official said.

Related news: GST row: Centre should borrow, four CM write to PM, FM

Last week, the Centre gave two options to states: borrow either from a special window facilitated by the RBI or from the market.

The first option has a special window for states to borrow the projected shortfall of ₹97,000 crore only on account of GST implementation and not the pandemic which will be fully repaid from the compensation cess fund, without being counted as states’ debt.

The second option takes into account the impact of the pandemic, suggesting that states borrow the entire ₹2.35 lakh crore and bear the interest burden, though the principal will be repaid from the cess proceeds. The GST shortfall amount (₹97,000 crore) will not be counted as states’ debt, while the rest will be counted in the books of the states.

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