Kerala FM says GST compensation cannot be linked to states' borrowing limit

Kerala Finance Minister Dr Thomas Isaac in his submission in the 42nd GST Council meeting today outrightly rejected the central government's stand that that states failing to choose one of the two options filling the compensation gap will lose their compensation till 2022.  

Dr Isaac in his speech during the meeting said that there can be no bifurcation of revenue shortfall for compensation purposes due to pandemic and due to implementation of GST, and that the entire shortfall needs to be compensated as it is the constitutional right of the states. He also said that the compensation cannot be linked to normal borrowing or additional borrowing limits allowed to states.

He said that both the options presented by the central government infringe upon the above two cardinal principles and therefore not acceptable.  

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The Kerala FM said that any discussion on the issue of compensation gap can be held only when the central government accepts these two principles - no bifurcation of revenue shortfall for compensation and no linking of compensation to borrowing limits of states.

"It is true that central government presented the two options before the Council, but states also presented their options. The issue continues to be open for a decision of the Council," he said.

He said that Council must try and arrive at the consensus on who should borrows - Centre or states - and in what proportion, what should be the amount to be borrowed this year and what amount to be deferred to 2022, and repayment through extension of the cess beyond five years.

The 42nd GST Council meeting has been convened to arrive at a consensus on how to plug the compensation gap of the states.  

The GST Council in its 41st meeting on August 27, 2020 had given two borrowing options to its member states to enable them to meet their compensation shortfall at the lowest possible single rate of interest at the RBI's single window facilitated by the Finance Ministry as per their individual choice.  

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The first option offered the states to borrow the shortfall arising out of GST implementation, estimated at Rs 97,000 crores approximately, to be borrowed through issue of debt under a special window coordinated by the Ministry of Finance. Under Option 1, the interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period. After the transition period, principal and interest will also be paid from proceeds of the cess; by extending the cess beyond the transition period for such period as may be required. The states will not be required to service the debt or to repay it from any other source.

The second option, on the other hand, offered the states to borrow the entire compensation shortfall of Rs 2.35 lakh crore (including the COVID-impact portion) through issue of market debt. Under this option, the states will not be required to repay the principal from any other source. However, the interest shall be paid by the states from their own resources.

As many as 21 states and union territories have opted for Option 1 of the borrowing plan recommended by the GST Council to plug their compensation gap. States including Jharkhand, Kerala, Maharashtra, NCT of Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, and West Bengal had not responded to the GST Council proposal to decide their options.

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