Dissenting states likely to accept GST solution

New Delhi

With the Centre agreeing to borrow ₹1.1 lakh crore from a particular window of the Reserve Bank of India and on-lend it to the states, a number of the seven states which are but to conform to the plan might now signal on, authorities officers with direct information of the matter stated on Friday.

The officers added that the Goods and Services Tax (GST) Council might, based mostly on income flows over the following few months, evaluation the quantum of borrowing.

The solely contentious challenge left is the remaining ₹1.25 lakh hole in compensation. As GST revenues enhance , this would possibly find yourself being solely ₹70,000 crore in 2020-21 (along with the ₹1.1 lakh crore), two officers belonging to completely different dissenting states and one working for the Union finance ministry stated on situation of anonymity.

“The Centre’s decision to borrow from the market and pass the same to the states as a back-to-back loan is in the spirit of cooperative federalism. That addressed our immediate concern. Later, GST Council may always review the financial position and take necessary steps on a similar principle,” one of many state authorities officers added.

The Centre’s determination on Thursday adopted by GST Council chairperson and Union finance minister Nirmala Sitharaman’s letter to states softened the stand of seven dissenting states on the difficulty of compensation cess, the second state authorities official stated.

The seven dissenting states are Chhattisgarh, Jharkhand, Kerala, Punjab, Rajasthan, Telangana and West Bengal. Puducherry had earlier indicated its desire for the borrowing choice, however the Department of Expenditure is but to obtain a proper communication, the third official, who works within the Union finance ministry, stated.

Sitharaman on Thursday wrote to the states: “I am also sensitive to the fact that States need to be protected from the adverse consequences of higher borrowing in the form of interest liability and addition to debt. Under Option-I the Union Government will arrange the borrowing in such a manner that the cost will be at, or close to, interest rate of the Union Government.”

On August 27, the Centre gave states the selection of borrowing ₹97,000 crore (the shortfall ensuing from GST implementation points) with out having to pay principal or curiosity or all the ₹2.35 lakh crore compensation hole (together with that arising from the Covid-19 pandemic) projected for this fiscal yr. The ₹97,000 crore quantity was subsequently raised to ₹1.1 lakh crore on October 5. Some states objected and insisted the borrowing must be completed by the Centre.

While 10 states initially opposed the plan, this quantity got here right down to seven by Wednesday. The GST Council is a federal physique, chaired by the Union finance minister, and whose members embrace the finance ministers of the state. This is the physique that decides tax charges and different points associated to GST. Until the current controversy, all its selections had been arrived on the idea of a consensus.

The finance minister’s letter stated the Central authorities faces “very serious” budgetary constraints. “Long-term macroeconomic stability is the responsibility of the Centre; but it is also in the interest of the States who are partners in our system of cooperative federalism. The bona fide opinion of the Central government on this macroeconomic issue is that borrowing on the books of Centre will not be optimal in the national interest,” Sitharaman wrote.

Commenting on the only window borrowing mechanism introduced yesterday, she stated, “We have now worked out some key aspects of the special window. Based on suggestions of many States, it has now been decided that the Central government will initially receive the amount, and then pass it on back-to-back to the States as loan. This will enable ease of coordination and simplicity in borrowing, apart from ensuring a favourable interest rate.”

She assured state governments that all the arrears of compensation will “eventually” be paid to states. She thanked states for his or her “collaborative” strategy that resulted in a “constructive and practical solution” to this challenge of compensation cess.

The GST Council, on October 5, unanimously prolonged the levy of compensation cess past June 2022 until such time the states are compensated for his or her assured income shortfall. At the time the brand new tax regime was launched in July 2017, the GST regulation assured states a 14% enhance of their annual income for 5 years (as much as June 30, 2022); any income shortfall must be made good via the compensation cess levied on luxurious and sin items akin to liquor, cigarettes, aerated water, vehicles, coal and different tobacco merchandise. The cess would have ceased to exist after June 30, 2022, with out the Council’s determination to increase it.

Kerala finance minister Thomas Isaac welcomed the Centre’s Thursday determination . “But there is one issue yet to be resolved- how much of compensation is to be deferred to 2023? Negotiate this point and reach a consensus,” he stated in a tweet.