Tamil Nadu CM urges Centre to revisit options on GST compensation

He asked the government to ensure that the states get their full dues of the compensation in the current year itself

Tamil Nadu Chief Minister Edapaddi K Palaniswami today wrote to Prime Minister Modi urging him agree to a mechanism in which the Centre would raise the required funds as a loan and lend it to the GST Compensation Fund against future cess receipts.

Palaniswami, who also leads BJP's ally AIADMK, said he was “concerned” about the options proposed by the Union Finance Minister on GST compensation to the States.

“Our stance has consistently been that the Government of India has a moral and legal obligation to compensate the shortfall in GST collections. The argument that States borrowing for what is essentially a Government of India obligation is a seemingly better optical arrangement that does not appear to be a strong or valid reason,” said the Chief Minister, requesting the Prime Minister to direct the Union Finance Ministry to revisit its stance in the matter.

Under both options suggested by the Centre, the States were required to borrow from the market to make good the shortfall in compensation due, which he argued was administratively difficult to implement and more expensive. Moreover, the reasons being cited for such an arrangement were not persuasive. “Whether the Centre borrows or the State governments borrow, for rating agencies and others who monitor macro-economic indicators, it is the overall general government deficit and borrowing that is relevant,” said the Chief Minister.

The net impact of the Centre’s proposed options was to reduce the overall resources available to States in 2020-21 quite substantially to the extent of about one per cent of GDP amounting to nearly Rs 2 trillion, he said.

“This will really hurt spending by States on many crucial Covid-19 and non-Covid-19 expenditure,” said the Chief Minister.

He insisted that the States should get their full dues of the compensation in the current year itself, and reduce neither the compensation payable nor the already announced and committed additional borrowing permissible to States of two per cent of GSDP under the Atma Nirbhar Bharat stimulus package under any circumstances.

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He also requested the Prime Minister to direct the Union Finance Ministry to provide a formal and categorical assurance that any spillover of the compensation due would be paid in the period after March 31, 2022. He also requested the relaxation of the conditionalities attached to the permission to be accorded by the Centre to States to borrow under the Atma Nirbhar Bharat scheme.

“These measures will ensure that not only are States treated justly and fairly in the matter of being provided the due compensation for the revenue shortfall post implementation of GST, but will also have adequate funds in 2020-21 to meet their essential expenditure commitments, and can thus effectively contribute to the revival of the economy,” he said.

The letter also stated that no compensation has been released for the shortfalls in revenue collection since April 1, 2020. As on date, a total sum of Rs 12,250.50 crore was due to Tamil Nadu as compensation for the shortfall in GST collections, of which Rs 11,459.37 crore has accrued from April to July, 2020.

Palaniswami said due to Covid-19 an additional expenditure of nearly Rs 7,000 crore has already been incurred towards upgrading health facilities, providing medical supplies and towards relief measures for the most affected.

“For the economy to restart effectively, State Governments also need to ensure that regular budgetary expenditure on on-going schemes and programmes picks up. Hence, State Governments are in immediate need of resources.”

During the recent GST council meeting, State Fisheries Minister D. Jayakumar had suggested that the Centre could mobilise resources and lend the funds required to the GST Compensation Fund and that loan could be serviced through an extension of the GST Cess for a few years beyond 2021-22. “This was a very reasonable and practical suggestion and was agreed to by almost all States,” said Palaniswami.