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GST compensation: Centre gives in, end of the impasse

In less than 24 hours of the deadlock that marked the completion of the 43rd GST Council meeting


Sentinel Digital DeskBy : Sentinel Digital Desk

  |  2020-10-20T09:00:44+05:30

Udayan Hazarika

(The writer can be reached at

In less than 24 hours of the deadlock that marked the completion of the 43rd GST Council meeting, it appears that good sense prevailed in the minds of the Central Government as it has finally given in to the demands of the States and agreed to borrow the amount required for payment of GST compensation to the States for shortfall in GST collection. This again is a unilateral decision and not a decision of the GST Council meeting. The question thus arises - if the Central Government is capable of taking such a unilateral decision, why wasting time on the meetings of the GST Council. This government decision also goes against the categorical view offered by the Attorney General of India Shri K. K. Venugopal on the matter of giving compensation to the States. As per media report, the Attorney General (AG) in his considered opinion offered that the Central government has no statutory obligation to pay the GST Compensation shortfall from its coffers. To deal with such a situation, the AG has reportedly suggested that the GST Council has to come up with a solution to meet the shortfall. This view of the AG was however not tabled in the Council meeting despite the repeated demands by the Member States. This view of the AG came at a time when we know that there exist a Statute namely Goods and Services Tax (Compensation to States) Act, 2017 which came into force on 1st July 2017 and which declared it in its preamble that "An Act to provide for compensation to the States for the loss of revenue arising on account of implementation of the GST".

On an earlier occasion it was stated in this column that the Centre is playing a whimsical role on the GST compensation issue and has no intention to take the States into confidence. The BJP-ruled States have in the meantime expressed their satisfaction about the reward that they have received from Centre in the form of borrowing power. In the 43rd meeting of the GST Council, the Finance Ministry has approved 20 first category States namely, Andhra Pradesh, Arunachal Pradesh, Assam Bihar Goa, Gujarat Haryana, Himachal Pradesh Karnataka, Madhya Pradesh, Maharastra, Manipur, Peghalaya, Mizoram, Nagaland, Odhisa Sikkim, Tripura, Uttar Pradesh, Uttarakhand. Later, by 14th October Tamil Nadu also joined the brigade of the States as 21st State who have opted for the Option-1. Total borrowing so far approved is Rs 78,452 crore which constitute @ 0.50% of the Gross State Domestic Product (GSDP) to those States who have opted for Option-1. The States agreeing to Option-1 are eligible for the facility of RBI's special window borrowing to meet the shortfall arising due to GST implementation. They are also entitled to unconditional permission to borrow the final instalment of 0.50% of GSDP out of the 2% additional borrowings as raised by the Government of India from the FRBM Act limit of 3%. This allowance is over and above the Special Window of Rs 1.1 lakh crore. As of today the remaining States have not come to the fold and Kerala has lately decided to challenge the Central Government's decision in the Supreme Court.

After the deadlock in the 42nd meeting of the GST Council, the sitting of the 43rd meeting on the 12th October was just a formality and both the parties knew about the outcome of the meeting. The non-BJP States continues to demand that the borrowing should be made by the Central Government and then disburse the same to the States. As usual, in the meeting the Union Finance Minister reiterated about the poor cess collection which leads to the present scenario. She also indirectly threatened the States that the cost of borrowing will go up if the borrowing calendar as fixed by the Central Government is not followed. This came from the FM at a time when the States were shaky about borrowing even at the currently prevailing rate. However, this yielded no result and the meeting ended without a consensus again.

The present arrangement is that Centre will borrow Rs 1.1-lakh crore loan and distribute it among the States expecting that all the States will join the option-1. As per the press release, the borrowed amount will be passed on to the States as a back to back loan and not as GST Compensation cess. Thus, there will be a change in the receipt head of account from revenue to capital. So far terms and condition of the loan has not been disclosed. The States will be getting this amount as State Development Loan - perhaps at a uniform rate of interest. As this will come as borrowed fund and thus will definitely add at the fiscal deficit of the State also. The Centre is making its biggest mistake as it thinks that amount will be shown as in the budget as Capital receipt and therefore it will not impact in the Fiscal deficit. But Centre has forgotten that it must show the source of the capital receipt and that will expose the nature of the fund – a borrowed fund will go to the fiscal deficit khata. There is only one way to separate the borrowing from fiscal deficit and that is - Centre has to lie about the source of the receipt – i.e. to make mistake intentionally. There is the Attorney General sitting who will not let go the Centre so easily.

Central Government's this decision would go a long way in mitigating the disastrous resource position of the States. This would also be respectful gesture for the late finance Minister Arun Jaitly who had assured the States saying that "compensation to states shall be paid for five years in full within the stipulated period of five years and, in case the amount in the GST compensation fund fell short of the compensation payable in any bi-monthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by a collection of cess in the sixth year or further subsequent years." However, a detailed guideline needs urgently to be issued clarifying i) as to the burden of interest, ii) how borrowed capital fund be kept outside the purview of fiscal deficit and iii) the position of the States who despite choosing the option-1 did not go for borrowing.

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