Kerala softens stand on GST issue after Centre’s decision on borrowing

The Kerala authorities on Saturday deferred its high-level assembly to debate a authorized choice to resolve the Goods and Services Tax (GST) compensation cess challenge days after Union finance minister Nirmala Sitharaman stated the central authorities will borrow Rs 1.1 lakh crore from the market on behalf of states and move the identical as a mortgage to them.

The transfer signifies that the Kerala authorities — one of many seven dissenting states that had objected to the Centre’s earlier borrowing choices for assembly the GST shortfall and had threatened to strategy the Supreme Court over the matter — is softening its stand on the problem.

HT reported on Saturday that with the Centre agreeing to borrow Rs 1.1 lakh crore from a particular window of the Reserve Bank of India (RBI) and on-lend it to the states, among the seven states that disagreed to the preliminary plan would possibly now signal on. The Union authorities’s transfer, introduced on Saturday, was anticipated to allay the first concern of paying larger curiosity prices if states needed to individually strategy the market.

“Kerala’s CM puts away scheduled high level meeting to discuss approaching SC [Supreme Court] on GST issue, in the light of new initiative by Union FM. Having amicably settled question of who should borrow, we hope she will address question of how much to borrow through dialogue with state FMs,” Kerala finance minister Thomas Isaac stated in a tweet on Saturday.

A Union finance ministry official stated the Centre and the GST Council, the apex federal physique for the oblique tax, are open for discussions. “Members can raise any issue in the Council that would be discussed. But, stopping willing states from borrowing was not possible under Article 293,” the official stated requesting anonymity.

On August 27, the Centre had given states the selection of borrowing Rs 97,000 crore (the shortfall ensuing from GST implementation points) with out having to pay principal or curiosity or the whole estimated Rs 2.35 lakh crore income deficit from the oblique tax (together with that arising from the Covid-19 pandemic) projected for this fiscal yr. The Rs 97,000 crore quantity was subsequently raised to Rs 1.1 lakh crore on October 5.

Some states objected and insisted the borrowing must be carried out by the Centre. While 10 states initially opposed the plan, this quantity got here all the way down to seven by Wednesday, with some saying they might contemplate authorized choices. The seven dissenting states have been: 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 official stated.

The official stated all states would ultimately agree as there may be “no dispute” and the GST council is dedicated to resolve “all differences”.

“Borrowing of Rs 1.1 lakh crore is in progress, which will help cash-strapped states. Meanwhile, GST collection is expected to improve in coming months. It will not only reduce the revenue shortfall, but also increase compensation cess collection. A review of financial position in the Council after the third quarter [December] could see significant reduction in the need for further borrowing. This is a dynamic situation and will be reviewed,” the official stated. HT reported it on Saturday.

The GST Council is a federal physique, chaired by the Union finance minister, and whose members embody the finance ministers of states.This is the physique that decides tax charges and different points associated to GST. Until the latest controversy, all its selections had been arrived on the premise of a consensus.

The Centre’s resolution on Thursday adopted by Sitharaman’s letter to states softened the stand of some dissenting states on the problem of compensation cess, a state authorities official stated requesting anonymity.

Sitharaman on Thursday wrote to the states, saying: “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.”

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 one window borrowing mechanism introduced on Thursday, 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 the whole 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.