The tussle between the Centre and the states on Goods and Services Tax (GST) payments is set to intensify. A proposal being piloted by the Union Finance Ministry to direct states to resort to market borrowing to meet their impending revenue shortfall, which is to be repaid subsequently from the compensation fund, is set to face a strong pushback from several states. States are of the view that the compensation fund is unlikely to have enough funds to even meet revenue shortfall in the near future, let alone having enough funds to cover for the borrowing by states.
A legal opinion on the issue offered by the Attorney General of India, specifically on bridging the revenue shortfall by directing states to borrow, is learnt to have put the ball squarely in the Centre’s court. While it is learnt that the AG opined that the Centre does not have the obligation to pay for revenue shortfall, the legal input suggests that the GST Council can recommend to the Centre to allow the states “to borrow on the strength of the future receipts from the compensation fund” and that the central government will have to take the “final decision in the matter”.
A state Finance Minister said the option to direct states to undertake market borrowing can also be implemented in an alternate way, with the market borrowing being undertaken by the Centre and then being repaid from the compensation fund. “All these issues have to be thrashed in the GST Council meeting. If states are allowed to take loans, why can’t the Centre take loans. So if the legal opinion is that states can be allowed to take loans, why has the Centre not been allowed to take loans. The Centre can also take loans, give the borrowed money to states and be repaid from the Compensation Fund — the same proposal that they have given to states, why not the same proposal has been put forward to the Centre,” the state Finance Minister told The Indian Express.
The minister further said that the Council had decided to seek legal opinion on whether the central government or GST Council can take loans, not whether states can be allowed to take loans and then be repaid from the cess fund. “At present, any state borrowing is as per permission from the central government, but states are guaranteed for it. This proposal just means relaxing the fiscal deficit limit by 0.5-1 percentage point and has nothing to do with the compensation fund,” he said.
The economic slowdown and the effects of the COVID-19 pandemic are expected to linger for a long time, so the receipts through cess flowing into the compensation fund will also not rise suddenly to be adequate to pay states, the minister said. “The economic growth is unlikely to spike all of a sudden in the next 3-4 years. The funds in the compensation fund will not be sufficient to even meet the regular requirement. So how can you repay out of that Fund and for how long are you going to extend it (compensation mechanism), for 10-15 years?,” he said.
Another state finance minister said that the Council needs to look into the demand of the states and there is a need for a strong dispute resolution mechanism to resolve such unilateral ways of directions to states. “How will the states cope? 80 per cent of the welfare activities, whether it’s health, or education, or even social security, are undertaken by the states,” he said.
State finance ministers said that the GST Council though will have to look at rationalising the rate structure, sooner or later. “The effects of COVID-19 pandemic are going to last long, so sooner or later the Council will have to take a call on raising GST rates, cess hike or inverted duty structure. After all, tax rates were increased for petroleum products by states during COVID as well,” one of the state finance minister said.
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