Non-BJP Ruled States Demand Centre to Borrow and Pay GST Compensation

Opposition-ruled states are vociferously urging the central government to borrow in order to compensate the states for the goods and services tax (GST) shortfall while rejecting the Union Finance ,inistry’s two proposed options in the 41st GST Council meeting last week. 

While the governments of Punjab, Kerala, West Bengal, Chhattisgarh, Jharkhand, Maharashtra, Rajasthan, Telangana, Puducherry and Delhi have been rejecting the Centre’s proposals, Tamil Nadu, Andhra Pradesh and Odisha are likely to join them, it has been reported. 

In the last GST Council meeting, the Centre had proposed two options -- either states could borrow the projected GST shortfall of Rs 97,000 crore through a special window in consultation with the Reserve Bank of India (RBI) or they can borrow Rs 2.35 lakh crore from markets under different conditions.

“We take both the options with great regret as a clear breach of the solemn and constitutional assurance by the central government. We believe this is a betrayal of the spirit of cooperative federalism that formed the backbone of the GST journey so far,” said Punjab Finance Minister Manpreet Singh Badal in a letter to the Centre.

As per GST (Compensation to States) Act, states are guaranteed revenue protection equivalent to 14% compounded annual growth rate in revenues from the base year 2015-16 till 2021-22. The law mandates the Centre to provide for bi-monthly compensation payments to states for the revenue gap from the compensation cess collections levied on sin and luxury goods.

Also read: COVID-19: States Face Fund Cuts and Delay in Tax Arrears from Centre

The issue of GST compensation has been contentious since last October as the Centre began delaying on the payments for the first time since the new tax regime had begun.

The GST compensation payment for August-September 2019, which was due in October, was paid in December. The compensation for October- November was released in two instalments in February and April. And again, the Centre released the compensation payments for months -- December to March in two instalments in June and July.

Amid economic slowdown during the last two financial years and the pandemic outbreak, several state government representatives have requested for the extension in the GST compensation period up by five years beyond financial year 2021-22.

At least 12 state chief ministers will write to Prime Minister Narendra Modi stating that they will not borrow money for GST Compensation, told Kerala Finance Minister Thomas Isaac.

Tamil Nadu CM Edappadi K Palaniswami, whose party AIADMK is in alliance with the BJP, has also written to the Prime Minister Narendra Modi, explaining the administrative difficulties for states to borrow from the market amid the COVID-19 crisis.

Talking about the repercussions in Telangana, and rejecting the Centre’s proposal for GST compensation, Telangana FM T Harish Rao said, “Before the implementation of GST, Telangana’s growth rate was 22%. If the GST was not implemented, Telangana would have got Rs 25,000 crore additional revenue in the last three years.”

Chhattisgarh Finance Minister T S Singh Deo tweeted that, “It was agreed among states that the Centre should make good the shortfall and most importantly only move through consensus in the GST Council instead of trying to push its agenda.”