Break the deadlock

GST compensation issue needs a pragmatic approach

Yet another meeting of the Goods and Services Tax (GST) Council ended without arriving at a consensus on the compensation issue. The impasse will affect the ability of the states, which are at the forefront of fighting the pandemic, to make necessary expenditure. This will not only hurt India’s fight against Covid-19 but also delay economic recovery. Though Union Finance Minister Nirmala Sitharaman has downplayed this as mere “differences” which need to be discussed, it is obvious that the stalemate is affecting Centre-state relations at a time when they should be working together to deal with multiple challenges. The Union government on Tuesday allowed 20 states to borrow Rs 68,825 crore. This will help these states in the near term but will not solve the problem. 

The share of the states in GST collection is expected to fall short by Rs 3 trillion in the current year. But the cess collected to compensate them would only be to the tune of Rs 65,000 crore, leaving a gap of Rs 2.35 trillion. The Centre has given two options to the states. Under the first option, the Centre will facilitate borrowing Rs 1.1 trillion. Both principal and interest on this borrowing will be repaid by extending the levy of compensation cess beyond five years. Under the second option, the states can borrow the entire amount but will have to bear the interest cost. Some states have asked why the borrowing cannot go above Rs 1.1 trillion.

Reportedly, some state governments are considering the option of approaching the Supreme Court to settle the matter. This must be avoided because it would further delay the resolution and not serve the states’ immediate needs. They would do well to settle the issue in the Council because it needs a political resolution. On balance, state governments have valid reasons to complain as the options for compensation were prepared by the Centre without adequate consultation. It is worth noting that in the eighth meeting of the GST Council, Arun Jaitley as finance minister had assured the states that if the compensation fund fell short, the GST Council would decide the mode of raising additional resources, including borrowing from the market.

This is not exactly how things have proceeded so far. It is also inaccurate to assume that borrowing by the Centre will have a greater bearing on macroeconomic fundamentals, as is being argued by the government. Both the Union and state governments borrow from the same pool of financial savings, and the Central government gets favourable rates because of a variety of factors. On their part, some states are also being unreasonable in their demand for full protection of GST revenues in an extreme and unprecedented situation like this. Their revenues outside the ambit of GST are not growing at 14 per cent in the current year. Thus, both the Centre and the states need to be more pragmatic and find a middle path. The Central government will need to take the lead. It is important to recognise that higher borrowing to compensate for the shortfall in the current year, and possibly even next year, will extend the levy of cess, which will create uncertainty and affect the business environment.