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GST compensation: Some state FMs object to market borrowing proposal, suggest steps to shore up revenue

Punjab Finance Minister Manpreet Singh Badal in a letter to Union Finance Minister Nirmala Sitharaman Friday stated that Centre had provided “innumerable assurances” in the run-up to GST for “assured and unhindered compensation”.

Written by Aanchal Magazine | New Delhi | Published: August 1, 2020 12:44:16 am
Manpreet Singh Badal, Thomas Isaac Manpreet Singh Badal and Thomas Isaac.

As states oppose the proposal for them to borrow to bridge the revenue gap under the Goods and Services Tax (GST) regime, some states have suggested raising tax rates and bringing more items into the ambit of compensation cess to shore up revenues.

Punjab Finance Minister Manpreet Singh Badal in a letter to Union Finance Minister Nirmala Sitharaman Friday took strong objection to recent reports of the central government not having the money or the obligation to pay GST compensation to states, stating that Centre had provided “innumerable assurances” in the run-up to GST for “assured and unhindered compensation”.

Punjab is already operating with a GST deficit of over 45 per cent, Badal said, adding the GST Compensation Act has been a central legislation and the obligation to pay compensation follows from the law’s enactment. He has suggested five measures — ad-valorem compensation cess to factor in inflation, subsuming central excise duty on cigarettes and tobacco products in compensation cess, settlement of pending IGST dues, bringing back certain items into the 28 per cent tax slab and inclusion of services consumed by rich in the

topmost 28 per cent slab — as possible solutions for reducing the revenue gap and hence the burden of compensation to states.


The matter at hand

After Finance Ministry officials are reported to have cited their inability to pay states in the near future in a Parliamentary panel meeting on Tuesday, followed by a legal opinion by AG suggesting that the Centre does not have the obligation to pay, states have stressed upon the commitment of compensation made at the time of the GST roll-out in 2017.

“Any shortfall after these adjustments may be met through central borrowings. This will be both efficient in terms of the cost of borrowing as well as equity. States should not be made to bear the burden of borrowing, which in any case is likely to be higher than the rate at which the central government will be able to borrow,” Badal said.

Kerala Finance Minister Thomas Isaac said, “AG opinion seems to be that if there is no money in cess fund it’s upto GST Council to make appropriate arrangements. Fine. But the Centre has 1/3rd votes in Council. No decision can be taken without its concurrence. So the question is, what is its stance? To pay or not to pay?”

Bihar Deputy Chief Minister Sushil Kumar Modi also concurred with the view that borrowing by states or the Centre, if to be repaid from the compensation cess fund, is not feasible. Instead the Centre must consider raising the long pending demand of raising the fiscal deficit limit for states to allow them to borrow more. “States have already been demanding raising the fiscal deficit limit unconditionally from 3.5 per cent to 4 per cent (of GSDP). States should be allowed to borrow more, which is not to be paid through the compensation cess fund. And even if that condition is put, nobody will give you that loan because there won’t be much money in that kitty (compensation cess fund). So, if there are not enough cess collections, then ultimately you have to pay from the consolidated fund (of states),” he said.

Modi said the only solution is to raise GST rates. “Not only states but the Centre is also getting less revenue and I don’t think it is feasible for the Centre to borrow and compensate states. It is not a one-time affair, it is going to continue for another 1 year or 2 years or more. So the only other option left is to increase the tax rates, which will have to be decided by the GST Council. Pandemic will continue for a much longer time, so ultimately you will have to decide after 1 month, 2 months or 3 months, whether it is inverted duty structure or tax rates, so that there is less revenue loss,” he said.

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