The Centre had proposed an increased borrowing limit in the ongoing 42nd goods and services tax (GST) Council meeting headed by finance minister Nirmala Sitharaman, assuming a 7% growth rate instead of the earlier assumption of 10% over the previous financial year. States had said the increase should be based on the actual rate of 2-3% witnessed last year.
The decision is the second such after the Council unanimously to extend the GST compensation cess levy beyond 2022.
Sources aware of the development said that levy will continue till the time the principal and interest are paid off, and be reviewed and decided from time to time. The initial proposal was to extend the levy by two years till 2024.
The rift between BJP ruled and opposition led states may widen with the former set to seek faster disbursement of funds through the special borrowing window proposed by the Centre.
But opposition led states will dig in their heels, demanding that Centre borrows and provides to states, as opposed to states borrowing, since it is the statutory obligation of the government to make up for revenue loss to states.
At the GST Council meeting on August 27, the Centre proposed that the states could borrow Rs 97,000 crore, equivalent to the revenue loss due to the GST transition, or Rs 2.35 lakh crore, equivalent to the revenue loss due to the GST transition and Covid-19. 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.
About 20 states have opted for the first borrowing option, but others have rejected both, which may prompt voting on the matter. States may also seek for a dispute resolution mechanism.
GST Council has worked on consensus among all stakeholders since inception, with the exception of one meeting where voting took place in December last year on the issue of state level lotteries.
The GST Council will also take up procedural issues aimed at simplification besides rate rationalisation on non-alcohol based sanitizers.