GST Council Meeting - Showdown Expected between Centre and Oppn-Ruled States Over Compensation Cess

While the government, in its GST compensation proposal, had asked the states to borrow to meet revenue shortfall, the states have demanded setting up of a dispute settlement mechanism.

The Centre and Opposition-ruled states are set for another face-off when the GST Council meets on Monday to debate the constitutionally mandated Goods and Services Tax (GST) compensation for state governments for FY21.

Around 10 non-Bharatiya Janata Party-ruled states have rejected the finance ministry's proposal.

The government, in its proposal, has asked the states to borrow to meet the GST revenue shortfall. The states have, however, demanded setting up of a dispute settlement mechanism.

Kerala, West Bengal, Punjab and Delhi want the Centre to fully borrow the GST revenue shortfall amount and compensate the states.

Finance Minister Nirmala Sitharaman, while assuring everyone, said, "Nobody is going to be denied compensation for losses arising out of implementation of GST or due to the coronavirus pandemic impact."

As many as 21 states - Tamil Nadu and those ruled by BJP - back borrowing Rs 1.1 lakh crore as the first option. They want it to be adopted so they can quickly access funds.

About 10 states want a group of ministers (GoM) to review the proposals or get the GST Council to consider a third option that involves the Centre and the states sharing the burden of the borrowing, proposed to bridge the deficit.

This tug of war between the Centre and the states has been going on for the past few months, ever since the coronavirus pandemic hit the state governments' revenues.

On August 27, the GST Council, in its 41st meeting, decided to give its member states two borrowing options to meet their compensation shortfall and a response time of seven working days from the formal receipt of the detailed proposal on options.

About 15 states had submitted their options by September 15.

The finance ministry is to facilitate the borrowings through the RBI's single window at the lowest possible single rate interest to all the states/UTs as per their individual choice.

OPTION 1 VS OPTION 2

Option 1 offers states to borrow the shortfall, arising out of GST implementation. It is estimated that approximately Rs 97,000 crore is to be borrowed through the issue of debt under a special window coordinated by the Ministry of Finance.

The option is to ensure a steady flow of resources, similar to the flow under GST compensation on a bi-monthly basis.

The main feature of option 1 is that the interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period.

After the transition period, principal and interest will also be paid from the proceeds of the cess, by extending the cess beyond the transition period for such period as may be required. The states will not be required to service the debt or to repay it from any other source.

Moreover, states will also be given permission to borrow the final installment of 0.5 per cent even without meeting the pre-conditions. This will enable borrowing of approximately Rs 1 lakh crore in aggregate. The borrowing under the special window will not be treated as a debt of the state for any norms which may be prescribed by the Finance Commission, etc.

Option 2 has offered the states to borrow the entire compensation shortfall of Rs 2.35 lakh crore (including the Covid-impact portion) through the issue of market debt.

The states will not be required to repay the principal from any other source. However, the interest shall be paid by the states from their own resources.