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Centre not obliged to pay for shortfall in GST compensation fund, says A-G

Says Centre not obliged to pay GST compensation shortfall; experts dislike idea of burdening states with additional debt

GST compensation | Goods and Services Tax | Attorney General

Dilasha Seth & Indivijal Dhasmana  |  New Delhi 

GST, goods and service tax
Pronab Sen, country director at International Growth Centre, said the responsibility to recompense is not on states

K K Venugopal has offered the Centre a way out of the compensation mess under the (GST) system, but has not recommended borrowings by the

He suggested that the Council can recommend to the Centre to allow states to borrow on the strength of future receipts from the compensation fund, said sources.

He also said the Centre is under no obligation to make up for the shortfall, added sources.

Experts, however, are not enthused by the idea of burdening states with additional debt.

Pronab Sen, country director at International Growth Centre, said the responsibility to recompense is not on states.

“If the says states can borrow over and above the central government permits, you will be pushing states into further indebtedness,” said the former chief statistician.

More importantly, there will be excess supply of state government bonds. In effect, yields on these papers will rise, he said, adding this will leave scar states’ expenditure because interest burden, too, will go up.

He suggested that the Council should recommend to the Centre that the latter borrow and transfer the funds to the states as grants.

“This borrowing can then be adjusted against the GST cess collections in future,” said Sen.

Since the situation of compensation cess collections started deteriorating, the deliberated on the idea of going for market borrowings at its meeting in March.

Can GST Council borrow?

Pradeep Kumar Jain, managing partner at Singhania & Co LLP, said even though the GST Council is a constitutional body, its function is to make recommendations to the Union and state governments on issues related to GST.

“Unlike other statutory bodies (such as Securities and Exchange Board of India, electricity regulatory authority, etc), it cannot hold property or exercise borrowing powers,” said Jain.

Kapil Rana, founder and chairman of HostBooks, also said the Council is not an organisation that can borrow money and distribute compensation deficits to states.

Alternatively, Jain said the Council can recommend monetising future revenue just like reverse mortgage or lease rent discounting. “Here, states can borrow on the basis of their GST collection, which can be paid later from revenue,” said Jain.

The Centre can also borrow or guarantee borrowing. A better option is for states to borrow on the Centre’s guarantee, he said.

But what happens if states default?

The liability would devolve on the Centre. To this, Jain said, “Certainly it will be the responsibility of respective states to repay. Since it is discounting its future revenue, there is a lesser chance for default.

An agreement can be executed between stakeholders.”


Rana said the Centre can establish a special purpose vehicle or can use the GST Network (GSTN). “Using the GSTN as an agency to monitor the distribution of deficit will help in many ways like curtailment or extension of the collection,” said Rana.

He said the Centre has better avenues to borrow money and has a bigger revenue budget to manage deficit in the overall balance sheet than states.

States are not going to like the idea of placing the burden on them to borrow more.

Earlier, Kerala Finance Minister Thomas Isaac told Business Standard that his state had proposed at the June 12 meeting that the GST Council be allowed to borrow and extend the compensation cess by another year or two and repay.

He said while Bihar Deputy Chief Minister Sushil Kumar Modi was forthcoming about it, Bharatiya Janata Party (BJP)-ruled states were mostly lukewarm to the proposal and pressed for a legal opinion on the matter.

He said the BJP-ruled states wanted to understand the legality. “Some raised the issue that the GST Council was not a sovereign body, and cannot provide guarantee. But then, the Centre will guarantee. So what is the problem?” asked Modi.

At a recent meeting of the standing committee on finance, the finance ministry expressed its inability to compensate states fully under the present circumstances. Isaac termed this as “brazen betrayal of trust”.

The Centre and states could collect Rs 14,591 crore as compensation cess in the first three months of the current fiscal year — 40 per cent less than Rs 24,613 crore in the corresponding period of the previous year. On the other hand, the target was to collect 16 per cent higher cess at Rs 1.10 trillion for 2020-21, against Rs 95,551 crore in the previous year.

First Published: Thu, July 30 2020. 20:51 IST