Policy

GST Council meet: No consensus over borrowing to meet compensation shortfall

Our Bureau New Delhi | Updated on October 12, 2020 Published on October 12, 2020

Borrowing by the Centre would lead to a rise in bond yields, says Nirmala Sitharaman

GST Council meeting on borrowing to meet compensation shortfall ended without any consensus on Monday. Now Centre has made it clear that States which are willing to borrow should not be stopped. It also reiterated it could not borrow.

“We were not able to arrive at a consensus,” Finance Minister Nirmala Sitharaman, who is also Chairperson of the GST Council told reporters after over 5 hours resumed meeting of the Council. The first part of the meeting took place on October 5. She said that those who have not opted for borrowing yet can seek further clarification and can join others who have given their consent.

She explained that borrowing by the Centre would lead to a rise in bond yields, increasing borrowing costs for the government and the private sector. However, this would not be the case if states borrowed against future GST receipts, she said, adding 21 states had agreed to borrow as suggested by the Centre, but other states insisted on a decision to be taken by consensus, she said.

In its previous meeting last week, the Council had decided to extend the surcharge on taxes on luxury goods such as cars and tobacco products beyond June 2022 but failed to reach a consensus on ways to compensate states for loss of tax revenue. The projected total compensation shortfall in the current fiscal stands at Rs 2.35 lakh crore.

The Centre had in August given two options to the states -- to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from the market. It had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing. Following a demand by some states, the amount of Rs 97,000 crore was increased to Rs 1.10 lakh crore.

As many as 21 states -- which are BJP-ruled or have supported it on various issues -- have opted to borrow Rs 1.10 lakh crore to meet the compensation shortfall. The Centre has released Rs 20,000 crore to the states towards compensation shortfall so far in the current fiscal.

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After the meeting, Finance Minister of Kerala Thomas Issac said in a tweet: “Union FM’s announcement that she is going to permit 21 states to borrow as per Option one is illegal. Option one involves deferment of compensation payment beyond five years for which a Council decision is necessary as per AG’s opinion. No such decision has been made in the Council.”

He termed it unfortunate that Union FM does not propose a decision in the Council or even make a statement of what she is going to do but choose to announce in the press conference. “Why does the Centre refuse to take a decision in Council? Total disregard for democratic norms?”, he asked.

However, he appreciated special assistance announced by the Centre earlier in the day. “An example of fiscally prudent stimulus policy of Central Govt : Rs 20,000 cr 50-year interest-free additional loan to states. Kerala is entitled Rs 200 cr. Some stimulus indeed!’, he said.

Commenting on the stalemate, M.S. Mani, Senior Director, Deloitte said: "Businesses would be keenly waiting to know the period, and the terms on which the compensation cess would be extended as that would have a significant bearing on their business plans.”

Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co mentioned that stalemate seems to be continuing on the issue of cess. “The only certainty is that the levy of cess will continue beyond 2022 which means that eventually its the consumers who will be funding the shortfall,” he said.

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Published on October 12, 2020
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