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Rajasthan CM Gehlot seeks PM Modi’s intervention over GST compensation tussle

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The Central government taking into account 10% growth over the previous year to project a higher revenue loss due to the Covid 19 pandemic, was arbitrary and had no legal justification, said Rajasthan chief minister Ashok Gehlot in his letter to the Prime Minister.

Gehlot sought Prime Minister Narendra Modi‘s intervention into the ongoing tussle between Centre and states on the issue of goods and service tax (GST) compensation, asking him to press on the Central government to make good on meeting the shortfall.

“Government of India is only recognising the GST loss by assuming a 10% growth over the previous year and attributing the rest to the Covid pandemic. This is arbitrary and takes only the interest of the Central government into account and has no legal justification,” the Rajasthan chief minister said in his letter dated September 7. ET has seen a copy.

He added that the since GST revenues were growing at 4% in pre-Covid year of FY 2019-20 and gross domestic product (GDP) growth was 4.2%, a 10% growth rate could not be applied. “A rate of 10% growth to project a higher revenue loss due to Covid is statistically untenable and factually sound,” Gehlot said.

Siding with Opposition led state governments, the Rajasthan chief minister noted that there was no case for states to borrow to meet the shortfall in the compensation fund, rather the Central government should borrow from the Reserve Bank of India and disburse to states as compensation. The repayment can happen through continuation of cess beyond 2022.

“I request your intervention in the matter for fulfilling the promise made by the government of India while persuading the state governments to accede to the introduction of GST and give up their right to levy certain categories of taxes,” Gehlot said, adding that the PM’s intervention was needed to restore the faith and trust in fiscal relations between the Centre and states.

He added that compensating the states was the legal obligation of the government under the Compensation Act and not the executive decision of the government or the GST Council. Gehlot further noted that former finance minister Arun Jaitley had said that while the Council could consider raising additional resources through borrowing, but it was never understood as borrowing on account of states.

“The Council does not have the power to alter the compensation mechanism without getting the Act amended,” he said, underlining that shortfall must be met through revenue transfer from the Centre.

Gehlot also questioned the mechanism of states borrowing from RBI on grounds that if they borrow, will the RBI hold state government debt on its balance sheet, as it does for Central government and would the loans taken be interest bearing. “It is inequitable,” Gehlot said in his letter, saying that under the RBI Act, RBI surpluses are transferred to the government as dividend.

“While the Central government reneges on its promise of paying the compensation to the states, it would end up making profit from the interest paid by the states,” he said.

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