JOIN USThe Central government has done well to go some distance in accommodating the demand of the states on GST (Goods and Services Tax) compensation. It partly conceded the demand by announcing that it will borrow Rs 1.1 lakh crore to lend to the states to compensate them for the shortfall in the GST revenue. There was no resolution of the dispute over compensation in successive GST Council meetings, and in the latest one held last week also, the Centre had reiterated its position that individual states should borrow to make up for their respective shortfall. The states ruled by the BJP accepted one of the two options given by the Centre but others rejected both, and planned to go to the Supreme Court. But with the Centre now deciding to borrow a part of the money needed for compensation, an immediate confrontation seems to have been averted.
The amount the Centre has now agreed to borrow is about half the expected shortfall of Rs 2.35 lakh crore. It is equal to the shortfall the Centre had attributed to GST implementation. It considers the remaining Rs 1.25 lakh crore gap as the result of Covid-19, for which it is not responsible. States did not accept such a distinction and wanted the entire shortfall to be made up by the Centre, though the BJP-ruled states later agreed with the Centre’s position. What the Centre has now decided is to make the borrowing from a special window in such way that it will not affect the fiscal deficit targets. The Centre will service the loan which will be repaid from the GST compensation cess. The cess will also be extended beyond the scheduled 2022.
The Centre’s decision will also avert the situation in which some states would have to pay a higher interest than others, if they had individually gone to the market for funds. It has eased the tension between the Centre and the states but the Opposition-ruled states would still not agree with the Centre’s argument that it is not responsible for the revenue loss on account of Covid-19. These states might raise the poser why the Centre cannot borrow the entire Rs 2.35 lakh crore if the loans will not affect the fiscal deficit and will be repaid from future compensation cess collections. Payment of compensation for the entire shortfall by the Central government would also be in accordance with the 2017 commitment made to the states, supported by legislation in parliament. The spirit of co-operative federalism also demands it. The climbdown by the Centre will hopefully pave the way for a larger agreement on the entire compensation issue based on a consensus involving all the states.