Opposition states insist Centre must borrow for GST compensation

About 10 states including Punjab, Kerala, Chhattisgarh, Jharkhand, Tamil Nadu, Maharashtra, Delhi and Puducherry have conveyed that the obligation to compensate states for the loss in revenue remains on the Centre, therefore states should not be f...

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If the conditions are triggered then the Reserve Bank of India can subscribe to the primary government securities, thus allowing the central government to borrow more
New Delhi: Opposition-ruled states are unlikely to budge on their stance and insist that the Centre should borrow to compensate them for the revenue loss on account of goods and service tax (GST) transition.

About 10 states including Punjab, Kerala, Chhattisgarh, Jharkhand, Tamil Nadu, Maharashtra, Delhi and Puducherry have conveyed that the obligation to compensate states for the loss in revenue remains on the Centre, therefore states should not be forced to borrow.

The position has been officially communicated to the Centre over the past week when chief ministers of most opposition-led states wrote to the government rejecting the two borrowing proposals mooted by the Centre. The Centre had on August 26 offered two borrowing options to states. The first one entailed a borrowing of Rs 97,000 crore, estimated as the revenue loss on account of GST transition, to be entirely serviced by cess collections. The second one included a borrowing of Rs 2.35 lakh crore, the revenue loss estimated on account of GST transition as well as the Covid crisis.


A week's time for states to choose one of the borrowing options provided by the Centre ended on Tuesday.

“They have taken the right of taxation away from states, they collect the taxes and then tell states that they must borrow, it makes no sense,” Chhattisgarh commercial tax minister TS Singh Deo said. The Centre had committed to compensate states for any revenue loss they incur on account of GST for a period of five years from 2017 roll out based on a CAGR of 14%. However, Covid-19 induced slowdown has dented GST collections as well as cess collections. Compensation payout to states is to be made out of the cess collections as per the GST compensation law.

“Our stand remains consistent, both options are not acceptable… the Centre should borrow,” said a senior official in Kerala state government, asking not to be named.
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Oppn States Insist Centre Must Borrow for GST Compensation
Tamil Nadu, Delhi and Punjab have also reiterated their stands to the government. “We have written to the government expressing our view… the central government should borrow and give to states,” said a senior official in Tamil Nadu.

A senior state government official requesting anonymity said that the Union government’s view of the central government not being obligated to give the compensation due to the states had created a sense of discomfort among states.

“If the government says they are not bound to give the compensation and they will not give it and instead tell the states that they will have to borrow, does not send the right signals… it shows that Centre is not willing to look for solutions rather than negotiating with states,” the official said.

Some states have flagged the enabling provisions in the Fiscal Responsibility and Budget Management Act of monetising government debt if the country’s output falls 3 percentage points below the average of the first three quarters. If the conditions are triggered then the Reserve Bank of India can subscribe to the primary government securities, thus allowing the central government to borrow more. The Centre has been wary of monetisation of deficit by the central bank as it is fraught with other risks such as a rating downgrade by rating agencies.

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The Centre has already increased its borrowing target for the fiscal to Rs 12 lakh crore from Rs 7.8 lakh crore estimated in the budget and it needs to keep room for any further borrowing to meet any exigency posed by tensions at the border with China as also keep the powder dry for providing support to the economy. States have the room to borrow as they are yet to reach the 3% limit specified in the FRBM. Moreover, borrowing limits have already been enhanced for the current fiscal in wake of Covid-19 outbreak.
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