With the Centre agreeing to borrow ₹1.1 lakh crore from a special window of the Reserve Bank of India and on-lend it to the states, some of the seven states that are yet to agree to the plan may now sign on, government officials with direct knowledge of the matter said on Friday.
The officials added that the Goods and Services Tax (GST) Council could, based on revenue flows over the next few months, review the quantum of borrowing.
The only contentious issue left is the remaining ₹1.25 lakh gap in compensation. As GST revenues increase , this might end up being only ₹70,000 crore in 2020-21 (in addition to the ₹1.1 lakh crore), two officials belonging to different dissenting states and one working for the Union finance ministry said on condition of anonymity.
“The Centre’s decision to borrow from the market and pass the same to the states as a back-to-back loan is in the spirit of cooperative federalism. That addressed our immediate concern. Later, GST Council may always review the financial position and take necessary steps on a similar principle,” one of the state government officials added.
The Centre’s decision on Thursday followed by GST Council chairperson and Union finance minister Nirmala Sitharaman’s letter to states softened the stand of seven dissenting states on the issue of compensation cess, the second state government official said.
The seven dissenting states are Chhattisgarh, Jharkhand, Kerala, Punjab, Rajasthan, Telangana and West Bengal. Puducherry had earlier indicated its preference for the borrowing option, but the Department of Expenditure is yet to receive a formal communication, the third official, who works in the Union finance ministry, said.
Sitharaman on Thursday wrote to the states: “I am also sensitive to the fact that States need to be protected from the adverse consequences of higher borrowing in the form of interest liability and addition to debt. Under Option-I the Union Government will arrange the borrowing in such a manner that the cost will be at, or close to, interest rate of the Union Government.”
On August 27, the Centre gave states the choice of borrowing ₹97,000 crore (the shortfall resulting from GST implementation issues) without having to pay principal or interest or the entire ₹2.35 lakh crore compensation gap (including that arising from the Covid-19 pandemic) projected for this fiscal year. The ₹97,000 crore amount was subsequently raised to ₹1.1 lakh crore on October 5. Some states objected and insisted the borrowing would have to be done by the Centre.
While 10 states originally opposed the plan, this number came down to seven by Wednesday. The GST Council is a federal body, chaired by the Union finance minister, and whose members include the finance ministers of the state. This is the body that decides tax rates and other issues related to GST. Until the recent controversy, all its decisions had been arrived on the basis of a consensus.
The finance minister’s letter said the Central government faces “very serious” budgetary constraints. “Long-term macroeconomic stability is the responsibility of the Centre; but it is also in the interest of the States who are partners in our system of cooperative federalism. The bona fide opinion of the Central government on this macroeconomic issue is that borrowing on the books of Centre will not be optimal in the national interest,” Sitharaman wrote.
Commenting on the single window borrowing mechanism announced yesterday, she said, “We have now worked out some key aspects of the special window. Based on suggestions of many States, it has now been decided that the Central government will initially receive the amount, and then pass it on back-to-back to the States as loan. This will enable ease of coordination and simplicity in borrowing, apart from ensuring a favourable interest rate.”
She assured state governments that the entire arrears of compensation will “eventually” be paid to states. She thanked states for their “collaborative” approach that resulted in a “constructive and practical solution” to this issue of compensation cess.
The GST Council, on October 5, unanimously extended the levy of compensation cess beyond June 2022 till such time the states are compensated for their assured revenue shortfall. At the time the new tax regime was introduced in July 2017, the GST law assured states a 14% increase in their annual revenue for five years (up to June 30, 2022); any revenue shortfall should be made good through the compensation cess levied on luxury and sin goods such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products. The cess would have ceased to exist after June 30, 2022, without the Council’s decision to extend it.
Kerala finance minister Thomas Isaac welcomed the Centre’s Thursday decision . “But there is one issue yet to be resolved- how much of compensation is to be deferred to 2023? Negotiate this point and reach a consensus,” he said in a tweet.