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Stalemate persists after states rebuff Centre’s GST offer

The Goods and Services Tax (GST) Council meeting on Monday put off for a week a decision on compensating states for the shortfall in their share of the indirect tax revenue after a stormy meeting where states governed by opposition parties insisted that the Centre borrow the entire ₹2.35 lakh crore deficit and reimburse them, four people who attended the meeting said.

The meeting had almost ended without resolving the demand of the dissenting states when they asked for a division of voting if consensus could not be reached, two finance ministers of opposition-ruled states said, requesting anonymity. “The crisis was averted as the chair deferred the matter for more discussion, which is judicious,” the finance minister of one state said.

Union finance minister Nirmala Sitharaman announced that the government will immediately release ₹20,000 crore to states for their revenue shortfall in the current financial year. This money is part of the ₹65,000 crore compensation cess expected to be collected in 2020-21 in the normal course.

“This year whatever we have collected [cess] till now, ₹20,000 crore will get disbursed tonight,” she said.

The Centre had placed two options before the states — borrow ₹97,000 crore (the amount has been raised to ₹1.10 lakh crore) to bridge the shortfall in revenue from GST, equal to the shortfall resulting from issues related to its implementation, without repaying either principal or interest, or alternatively, borrow the entire ₹2.35 lakh crore (the remaining deficit caused by the Covid-19 pandemic) and bear significant interest costs.

As many as 21 state governments opted to borrow ₹1.10 lakh crore to repay the funds that would come out of the cess levied on sin goods like cigarettes, pan masala and aerated drinks; and luxury products like automobiles. Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana and West Bengal, had demurred.

“About 10 members have expressed their inability to accept either of the two options given to states — borrow ₹97,000 crore and pay principal and interest from compensation cess fund, or borrow ₹2.35 lakh crore and bear the interest cost. We proposed a third option — the Centre should borrow the entire shortfall, compensate states in full and retire the debt from the compensation cess fund,” the minister said.

The Centre could have moved ahead with the first option as 21 states, the majority, have already accepted it. But, it would not have been possible without a division of voting, the ministers cited above said.

Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh have, so far, opted for the first borrowing option.

A person representing the central government said on condition of anonymity: “The issue of borrowing is not something which is under the jurisdiction of GST Council. Legally, some 10 states cannot stop other members — 21 states — from opting for the first borrowing option.”

“Today the Council exercised its authority to extend the levy of cess beyond June 2022. This decision has actually assured all states that they will get full compensation with respect to any shortfall as compared to the protected revenue of 14% growth. But those [states] who want to borrow cannot be stopped,” the person said.

Borrowing is the individual choice of a state, which squarely falls under the Article 293 of the Constitution, the person said. “When something is not under the jurisdiction of the GST Council, how can any voting or division be permitted? Voting can occur in GST Council only on those matters which are under the express jurisdiction of the GST Council,” the person added.

“If there is no consensus in the GST Council on the above negotiable issues, the legal provisions for Dispute Resolution Mechanism within the Council should be activated without delay,” Kerala finance minister Thomas Isaac said.

He put forward two non-negotiable cardinal principles on compensation — there can be no bifurcation of the revenue shortfall for calculating compensation, with one portion being blamed on Covid-19 on another on GST implementation issues; secondly, compensation cannot be linked to normal borrowing or additional borrowing limits allowed to states.

“Both the options presented by the central government infringe upon the above two cardinal principles and therefore not acceptable,” he said.

Once the two basic principles enunciated above are accepted, compensation can be discussed and an attempt made to arrive at a consensus on issues such as who borrows and in what proportion, how much to borrow this year and how much in 2022, Isaac said.

There was a consensus in the Council to extend the period of compensation beyond June 2022, for such period as may be required to meet the revenue gap, Sitharaman said at a press conference after the meeting.

The GST Council is empowered federal body on matters related to the indirect tax. It is chaired by the Union finance minister and represented by the finance ministers of states.

On deferring the meeting for one week to October 12 over the compensation cess issue, she said that 21 states had chosen the first option, but there were some that have not chosen either.

“It was felt that you can’t decide on the basis of 21 which have written to you, we need to talk further,” she said.

“I was also gently reminded that I can’t take anybody for granted. I don’t take anybody for granted, I have said this there and I am saying it here. I’ve always been open for more and more talk which is what I have said there and I’m saying it here too,” the finance minister said.

At the time the new tax regime was introduced in July 2017, the GST law assured states a 14% increase in their annual revenue for five years (up to June 30, 2022); any revenue shortfall should be made good through the compensation cess levied on luxury and sin goods. The cess would have ceased to exist after June 30, 2022, without the Council’s decision to extend it.

Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP, said: “Though the Centre has increased the borrowing limit under option one, the same is not expected to pacify the opposition-ruled states and they are expected to stick to their guns in the upcoming meeting on October 12th, forcing the centre to either constitute a committee of ministers or formulate another dispute resolution mechanism to bring consensus.”

Atul Gupta, partner at Deloitte India, said, “There is an underlying and implicit recognition by the GST Council members of the fact that the authority and responsibility of the GST Council should not get undermined and to that effect there has been a concerted bid by all participants for achieving a consensus on the issue of shortfall in compensation cess and also of GST revenue accruing to the states.”

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