Non-BJP states unhappy with GST relief plan, may forge joint strategy

(This story originally appeared in image on Aug 30, 2020)

NEW DELHI: The Centre on Saturday circulated two options for states to borrow and meet the GST shortfall, which will be repaid via an extension of the compensation cess beyond the June 2022 deadline. The proposal, however, did not find the support of all states. Most states not ruled by BJP plan to meet on Monday to formulate a common strategy opposing the plan.

In line with the deliberations at the GST Council meeting earlier this week, the finance ministry has proposed that states be allowed to borrow Rs 97,000 crore against an estimated shortfall of Rs 3 lakh crore between April 2020 and January 2021. The shortfall is due to implementation-related issues.

Under this option, the entire principal and interest will be paid out of the compensation cess on cars, soft drinks, pan masala, tobacco and coal, which will be extended beyond the current deadline of June 2022. States that opt for this will get loans at a specially arranged rate and the debt will not be added to their balance sheet, giving them room to borrow more in the coming years.

Under the second option, where the total borrowing has been pegged at Rs 2.35 lakh crore (with Rs 65,000 crore flowing from the cess this year), states will have to borrow from the market, which means the cost will be higher. More importantly, those that opt for this route will have to bear the entire interest burden as only the principal payment will be covered by the cess and they will give up on the borrowing headroom.

“None of the states should have a problem, we are honouring the commitment that former finance minister Arun Jaitley had given. The first option will allow states to get the benefits of cess when the loan is repaid,” a Union government functionary told TOI.

Some of the BJP-ruled states indicated their willingness to back the first option. “We are studying the proposal, but prima-facie option one is beneficial to states. We must also bear in mind that it is not just state finances that have been hit by Covid-19, even the Centre has to bear the stress. There are also other requirements such as higher defence spending,” Bihar deputy chief minister Sushil Modi said over phone from Patna.

Opposition-ruled states want the Centre to take over the debt burden, arguing that they have much lower headroom to either borrow or service it. Besides, they argue that the Centre can raise funds at a cheaper rate. “I am not in favour of states having to borrow. The Centre is pressuring states to borrow. We will take a call on Monday,” Chattisgarh minister T S Singh Deo, who represents the state in the GST Council, told TOI. Given the differences, the issue is expected to be back in the GST Council soon for a final decision.

“The Central government’s position is that any compensation to states will only come through compensation cess unless the GST Council decides otherwise. However, if states opt for the Rs 2.35 lakh crore option, only the principal will come out of compensation cess. Given this, states will perhaps decide on the option depending on their situation and revenue projection. It’s not clear as to what the GST Council will decide if a few states go for Option 1 and others for Option 2,” said Pratik Jain, who leads the indirect tax practice at consulting firm PwC.