With the pending compensation issue continuing to fester as a discord between the states and the Centre ahead of the 42nd Goods and Services Tax (GST) Council meeting on Monday, opposition-ruled states plan to raise concerns about bifurcation of revenue flag on account of GST implementation and the pandemic.
Alongside these issues, there is likely to be a push for instituting a dispute resolution mechanism and the appointment of Vice-chairperson. The opposition-ruled states are also likely to raise objections to the calculation of estimates given for the borrowing options, which assumes a high 10 per cent growth for the compensation cess deficit projections, along with a push for de-linking of the borrowing options from the normal borrowing limits of the states.
The state of Kerala is likely to put forth the view that there is no scope for distinction of revenue shortfall due to pandemic and GST implementation, and the entire compensation shortfall needs to be compensated. It is likely to submit the view coercion to make the states accept one of the two borrowing options is the lowest point in Centre-state fiscal relations. The state is likely to submit and also raise the issue of states’ limited borrowing capacity to bear the full burden of borrowing to meet the compensation deficit, that at present is independent of GST compensation.
Kerala is of the view that the options offered to states for borrowing infringe upon the principle of compensation defined in the law. Kerala Finance Minister Thomas Isaac plans to raise the issue to clarify whether interest will be paid for two years when the compensation due to Covid-19 would be deferred to year 2022.
The incorrect apportionment of Integrated GST (IGST) and compensation payments which were due to states in 2017-18 and 2018-19 will also be raised by states in the meeting. Since cesses are kept outside the divisible pool, the states being given only 32 per cent of the Centre’s resources against the promised 42 per cent, states like Kerala are of the view that the Centre incorrectly appropriated a sum of Rs 88,344.22 crore in FY18 and Rs 13944 crore in FY19 from IGST account by crediting it to the Consolidated Fund of India (CFI).
The continued adoption of the erroneous process of devolution of IGST to states and retention of unapportioned balance in the CFI instead of first apportioning IGST between the Centre and states/UTs and then devolving states’ share from the amount apportioned to the Centre, states has lead to overall funds received on account of IGST being less than what was mandated.
Punjab and Chhattisgarh have already voiced their concerns that the majority view of the ruling party at the Centre is being adopted as the choice for all, even as the opposition-ruled states have still not opted forthe borrowing options. Punjab has asked for activation of the dispute resolution mechanism, stated in Article 279 of the Constitution, while Chhattisgarh has been of the view that GST-related decisions should be taken by consensus and not majority.
The Centre’s estimates have pegged the GST compensation requirement at around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore — an estimated compensation shortfall of Rs 2.35 lakh crore (assuming a 10 per cent revenue growth over last year).
In the previous GST council meeting held on August 27, the Centre had proposed two options to the states: to either borrow Rs 97,000 crore (shortfall only on account of GST implementation) from a special window facilitated by the Reserve Bank of India or the complete shortfall of Rs 2.35 lakh crore (including Rs 1.38 lakh crore shortfall due to Covid-19 pandemic) from the market. While 21 states have opted for option 1 among the two borrowing options, 10 opposition-ruled states have still not made a choice.
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