Borrowing by states for GST compensation to be cost inefficient: Punjab FM

Expressing ‘shock’ over the Centre’s stance on compensating states for goods and services tax (GST) shortfall, Punjab has pressed for market borrowing by the Centre to make up for the inadequate cess collection apart from operationalising the dispute resolution mechanism to settle the issue.  It has also recommended measures like widening the scope of compensation cess to cover more goods and services.
 

“The recent reports that the central government has informed the parliamentary panel that it has neither the money, nor the obligation to pay the GST compensation to states, has come as a complete shock,” said Punjab's finance minister Manpreet Singh Badal in a letter to his Union counterpart Nirmala Sitharaman.
 

Rejecting the attorney general’s opinion of allowing states to borrow to meet the compensation requirement, Badal pointed out that it will burden states with high cost of borrowing. He has recommended a slew of measures to increase cess collection including bringing those services and goods under compensation kitty that earlier attracted 28 per cent tax.
 

“Any shortfall after these adjustments may be met through central borrowings. This will be both efficient in terms of cost of borrowing as well as equity. States should not be made to bear the burden of borrowing, which in any case is likely to be higher than the rate at which central government will be able to borrow,” said Badal.
 

Punjab is facing a GST deficit of over 45 per cent, the highest in the general category states, Badal said. At the current pace, it is likely to exceed 60 per cent by the time compensation period is over, he added.
 

Punjab received the fifth highest compensation in 2019-20 worth Rs 12,187 crore, behind Maharashtra, Karnataka, Gujarat and Tamil Nadu.
 

Attorney General K K Venugopal has suggested that the Council can recommend to the Centre to allow states to borrow on the strength of future receipts from the compensation fund. AG has also noted that the Centre has no legal obligation to pay compensation to states.
 

“More than the legal interpretation (which may itself come under judicial challenge at some stage), you must take note of Centre’s innumerable assurances in the run up to the GST to provide for assured and unhindered compensation,” Badal said.

He added that some of these assurances are also recorded in the minutes of the meetings of the empowered committee from time-to-time and also in the early meetings of the Council. “This assurance from the Centre was in fact the real edifice on which GST consensus was achieved,” he said.
 

Badal added that the law suggests that the compensation doesn’t have to come from cess alone.
 

He also pressed for operationalisation of the dispute resolution mechanism to arrive at a solution on the vexing issue. “In a federal polity there shall always be some disputes on legal interpretations. Constitution allows their healthy resolution through a mechanism that is yet to be operationalized. Should the Council fail to meet a consesnsus on this issue there may be no harm in resolving it through the dispute resolution process,” said Badal.