High drama unfolded at the crucial Goods and Services Tax (GST) Council meeting on Monday. At least 10 Opposition-ruled states resisted the Union finance secretary’s attempts to “abruptly” conclude the meeting in favour of the first option on the issue of compensation.
According to sources, after over six hours of deliberations, Finance Secretary Ajay Bhushan Pandey announced that the Department of Economic Affairs will be asked to prepare for borrowing by states, an option strongly rejected by Opposition-ruled states.
In fact, Andhra Pradesh and Puducherry, which the Centre had earlier claimed were among the 21 states that had picked option 1, also pressed for borrowing by the Centre.
This technically takes down the count to 19 states that have picked the first option of borrowing Rs 1.1 trillion under a special window of the Reserve Bank of India. The Centre has decided to revise the borrowing limit under the option to Rs 1.1 trillion from Rs 97,000 crore proposed earlier.
“After six-and-a-half hours of discussion, when the house was almost equally divided, finance secretary suddenly said that the meeting is closed that that we will ask the DEA to get ready for borrowing by states, which is option 1,” said a source. “All opposing states then rose and resisted the move and argued that it was against GST rules as there was no consensus on the issue. It was only then that Union Finance Minister Nirmala Sitharaman agreed to meet again after 5-6 days to create a consensus,” he added.
The GST Council will meet again on October 12.
About 10 Opposition ruled states have proposed a third option to the government, which involves borrowing by the Centre as it can do so at competitive rates. To facilitate that, the compensation cess period has been extended indefinitely beyond June 2022, till the entire principal and interest is repaid and states fully compensated for the GST shortfall.
“The rate at which Centre borrows is about 2 per cent lesser than what we will get. They have the capability to borrow, the window to borrow and a lower rate,” said West Bengal Finance Minister Amit Mitra. He added that with the compensation cess period being extended indefinitely, the Centre will not have to spend even a single rupee from its Budget.
Another state finance minister pointed out that states are not in a position to borrow with most defaulting on salaries and pensions. “Centre can monetise its fiscal deficit,” he said.