Fireworks are expected at the 42nd meeting of the GST Council to be chaired by finance minister Nirmala Sitharaman. A showdown is expected between Centre and states over the contentious issue of opting for one of the two options presented by the Centre to states as they grapple to meet GST shortfall at a time when revenue generation has been severely hit by the pandemic.
While 21 states that are either ruled by the BJP or those that have supported it have chosen the option to borrow Rs 97,000 crore, others like Delhi, Punjab, West Bengal, Telangana, Chhattisgarh, Tamil Nadu, Rajasthan, Kerala and Puducherry have resisted both the options and have put the onus of borrowing on the Centre to help them meet the shortfall. Indications are that these opposition-ruled states will resist any attempt at the GST Council meeting that could potentially favour a decision that involves borrowing by states.
The compensation imbroglio
States are guaranteed to be compensated for any loss of revenue owing to the implementation of the GST that entailed giving up powers to collect taxes under the earlier system. The consumption based tax brought a great deal of uncertainty for producer states. The loss to the states is computed based on a formula provided in the GST (Compensation to States) Act. According to the formula, the states are guaranteed 14% compounded growth in GST revenue each year. Any shortfall will be met through a compensation cess that is levied on luxury and sin goods and goes to the compensation fund.
The two ‘inconvenient’ options
In its 41st meeting on August 7, the Centre gave two options to states — either borrow Rs 97,000 crore that is the estimated shortfall due to the implementation of the GST or borrow the entire Rs 2.35 lakh crore shortfall in revenue owing to a loss because of the pandemic. The Centre further added that the states would get a 0.5% relaxation in the borrowing limit under the FRBM Act if they opt for borrowing Rs 97,000 crore while no such relaxation would be offered if the states were to opt for the other option.
In the first option, the principal and interest would be paid from the cess fund, while in the second option, the states would bear the interest. The GST Council could consider extending the GST compensation cess by two years till 2024.
The compensation to states can’t be doled out from the Consolidated Fund of India and has to be given from the compensation fund only. But the lacklustre performance of the economy in the previous fiscal meant that there was decreased collection of cess and last year’s shortfall for states was met from cess collections of previous years. The situation is likely to worsen this year as the pandemic has brought the economic growth into the negative territory after a four-decade period which means that the revenue collection will see severe stress in the current fiscal.
What the states say
While the BJP ruled states and those that support the party have largely agreed to go with the option of borrowing Rs 97,000 crore, the opposition ruled states have put their foot down as they have maintained a defiant stance that borrowing by states will endanger their finances further.
The 42nd meeting slated for today is expected to build some sort of consensus among the opposing states and the Centre. The finance minister, Nirmala Sitharaman, had said that the Centre is not reneging on its promise to compensate the states for the shortfall due to implementation of the GST. How that plays out is a call the GST Council meeting will take today.