The Union government is willing to engage with dissenting states that have not accepted either of the options offered to make up for the gap in GST compensation, a top finance ministry functionary said on a day the Centre permitted 20 states to borrow ₹68,825 crore from the market to bridge the shortfall, and the finance ministers of some of the dissenting states indicated that they would go to the Supreme Court or demand an independent dispute resolution mechanism.
The finance ministry functionary, who asked not to be named, added that while the government will discuss any workable proposal the nine states bring at the Goods and Services Tax (GST) Council with an open mind, it cannot stop 22 other states from borrowing from the market against their future compensation cess dues.
Maharashtra has already secured the Union finance ministry’s approval for a loan of ₹15,394 crore. Thus far, including Maharashtra, 20 states have been granted clearance to borrow, an official statement said. Two more of the dissenting states have also indicated their willingness to borrow, a finance ministry official with direct knowledge of the matter said on condition of anonymity.
But Kerala finance minister Thomas Issac said the Centre cannot postpone the payment of compensation indefinitely, and should take the loan to pay the states, as per its statutory obligation. The minister said he is in touch with his counterparts and they can move the Supreme Court if the Centre forces states to borrow from a special window facilitated by the Reserve Bank of India (RBI).
The controversy surrounds a GST compensation shortfall of ₹2.35 lakh crore. In August, the Centre gave two options to the states — borrow ₹97,000 crore from a special window facilitated by the central bank or ₹2.35 lakh from the market. It also proposed extending the compensation cess on luxury and sin goods to repay the borrowing. At a subsequent meeting of the GST Council, the amount in the first option was raised to ₹1.1 lakh crore.
The states have enough headroom to borrow, the finance ministry official said: “Only five months are left [in the financial year], but none of them have crossed even the 3% [of gross state domestic product (GSDP)] limit despite the fact that they can borrow up to 5% of their [GSDP]. Their borrowing is fully protected as both principal and interests are repaid through compensation cess that will continue till their debt obligations are fully met.”
Thus far, the 20 states that have chosen Option 1 are: Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Sikkim, Tripura, Uttar Pradesh, and Uttarakhand.
A minister from one of the dissenting states said on condition of anonymity that a consensus would be “ideal”. “The FM [Nirmala Sitharaman] is also willing to discuss the matter, which is the best way as legal option is not always prudent.”
The Union finance minister is the chairperson of the apex federal body, GST Council. Finance ministers of states are its members and conventionally they strive to take decisions on the basis of a consensus.
Jharkhnad finance minister Rameshwar Oran, too, said he was hopeful of consensus emerging in the GST Council on the issue. Isaac was more critical, though: “What it (the Centre) is doing is nothing but betrayal. If payment of compensation is delayed further we will take legal recourse after talking to other states.” Telangana finance minister T Harish Rao said it was unfortunate that “for the first time, the Centre has taken a unilateral decision without considering the views of states”. “We lodged our serious protest with finance minister Nirmala Sitaraman,” Rao said. “Whether we should take to legal recourse or there is any other option to get more funds from the Centre would be decided after the high-level meeting with the chief minister.” Chhattisgarh finance minister TS Singh Deo said it is sad that the Centre wants to abandon the states during this stressful economic time by not taking up the responsibility of taking the loan which is fully protected by the extended GST cess collected beyond June 2022. Punjab finance minister Manpreet Singh Badal said that he suggested setting up a group of ministers to resolve the dispute between the states and the Centre arising out of recommendation of the GST council, but there was no response to his suggestion. “We are close to causing irreparable damage to One-Nation-One-Tax concept that is the soul of the (GST) law,” he added.
Delhi deputy chief minister, Manish Sisodia, who also holds the finance portfolio, said the central government owes ₹16,000 crore as GST compensation to the Delhi government and has not paid this money leading to the government struggling to pay salaries even to our teachers and doctors. “The central government should be largehearted and help us. But, is only giving excuses and finding ways to stop allocation of funds to Delhi.” West Bengal finance minister Amit Mitra, who has been the biggest critic of the Centre’s two options, said the Centre should respect cooperative federalism using its “brute” majority and said all options are available to them, including taking legal recourse. On Tuesday, Mitra briefed chief minister Mamata Banerjee about the meeting and the Trinamool Congress, in a statement, said the CM will take decision on next course of action.
Pratik Jain, partner and leader, Indirect Tax, at PwC India, said: “It’s clear that Centre now wants to focus on option 1 only and nudge the remaining States to take a view in the matter. One would hope that GST council will resolve the issue with consensus over the next few days, though possibility of this going to court cannot be ruled out.” Sunil Kumar, DGM at tax consultancy firm Taxmann, said: “As consensus has not been achieved on the issue, the go-ahead given to 20 States to borrow money under option 1 may impact persuasively on the future functioning of the GST Council.”
(State bureaus and PTI contributed to this report)