With Covid-19 and subsequent lockdowns putting finances of over a dozen states under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlays, a meeting Thursday of the GST Council — the Centre-state governing body for the Goods and Services Tax (GST) — looks set for a showdown over delayed clearance of outstanding bills and escalating differences over compensation payments.
Maharashtra, Punjab, Karnataka and Tripura are among states reporting delays in salary payments to healthcare workers. In Uttar Pradesh, Telangana, Karnataka and Madhya Pradesh, salaries have been delayed to staff of educational varsities. In this backdrop, most of the states are likely to confront the Centre on clearances of GST compensation payments pending since April this year. An evolving consensus among states, including some BJP-ruled states, on the need to raise the unconditional fiscal deficit limits and clear outstanding bills is also expected to be flagged at the meeting.
The stress in finances has left states with little space for increasing capital expenditure, an area of growing concern given that over the last few years, with states, cumulatively, spending about one-and-half times more than what the Central government. This also comes at a time when states have been forced to hike their spending on health to counter the pandemic, even as, apart from faltering GST revenue proceeds, realisations from liquor excise and stamp duties remain weak.
A move by the Centre to conditionally hike borrowing limits for states is not of much help, given that only eight states qualify for this.
A growing number of state finance ministers have been increasingly outspoken in flagging their concerns especially in light of delayed GST compensation, given that states no longer possess any taxation rights after most taxes — excepting those on petroleum, alcohol and stamp duty — were subsumed under GST. GST accounts for almost 42 per cent of the states’ own tax revenues, and tax revenues account for around 60 per cent of the states’ total revenues.
For states, GST accounts for almost 42% of their own tax revenues. With the Centre yet to make GST compensation payments for the last four months, many states have been forced to put on hold their capital spending, and are even struggling to pay monthly salaries of staff.
“The Covid-19 situation makes the financial position of states even more grim as states are unable to cut down on the expenditure required to curtail the pandemic. All our taxation was taken over by the Government of India, then promises made, and now they’re saying we can’t give you, we don’t have the money,” a state finance minister told The Indian Express.
In a letter to Union Finance Minister Nirmala Sitharaman on Wednesday, West Bengal Finance Minister Amit Mitra said asking states to borrow will increase their debt servicing liability and may lead to cuts in expenditure which is “not desirable” when the economy is witnessing “severe recessionary trend”.
“It appears that our worst fears are coming true. It is surprising that the constitutional guarantee given to the states is being interpreted in a manner that the Centre is not responsible to compensate the states and it is the states (in the GST Council) which will have to find means to compensate themselves. Nothing can be more damaging, unfair and unjust than this,” Mitra said.
Also, the assertion of no legal obligation by the Centre to not pay states has not found favour with the states, who say GST was rolled out on the premise they will surrender their taxation power and be compensated for a five-year transition period ending 2022.
“We don’t have the capacity to borrow. At present, whatever the borrowing limit is, there will be difficulty in the coming days. So, according to law, the Central government is not bound to pay compensation to states, but it is the moral responsibility… if the Central government doesn’t help states now, then they will slip into a lot of difficulty. If borrowing has to be done, the central government should borrow and the compensation cess fund should be increased for another five years. Compensation fund is only for 2022, it can be further extended for another five years and the central government should borrow and they can repay that borrowed money out of that compensation fund. It’s a big issue and it should be resolved,” Bihar’s Deputy Chief Minister Sushil Kumar Modi said.
Kerala Finance Minister Thomas Isaac said the solution to GST imbroglio was for the Central government to empower GST Council to borrow for meeting the compensation requirement. “…if necessary through an ordinance, on the strength of future receipts of an extended levy of compensation cess beyond 5 years by an appropriate notification,” he tweeted.
While states have been permitted to borrow up to 5 per cent of their GDP this year, up from 3 per cent, the conditions imposed for this ensures that only a handful of states qualify for this. The Centre had in May raised the net borrowing limit for state governments from 3 per cent of the gross state domestic product (GSDP) to 5 per cent but only 0.5 percentage point of the extra borrowing window was unconditional. One percentage point after that was to be made available in four equal tranches and balance 0.5 percentage point can be accessed if milestones are ‘completely achieved’ in at least three out of four reform areas—universalisation of ‘One Nation One Ration card’, ease of doing business, power distribution and augmentation of urban local body revenues.
Only eight states — Maharashtra, Tamil Nadu, Gujarat, Karnataka, Uttar Pradesh, Andhra Pradesh, Madhya Pradesh and Haryana — will fulfil the conditions set for additional borrowing of 2 per cent of the GSDP, State Bank of India said in its recent research report, adding that this would lead to only Rs 3.13 lakh crore being borrowed by states out of total available space of Rs 4.28 lakh crore. Till August 18, all states have borrowed Rs 2.5 lakh crore, which is around 30 per cent of the authorised limit leaving 70 per cent unutilised, it said.
“Given that general government spending was one of the major drivers of economic growth till the beginning of this fiscal, with state governments accounting for a majority of total general government spending, the worsening position of states finances is poised to have a bearing on India’s overall recovery process post the pandemic,” it said.