The Kerala government on Saturday cancelled a meeting to discuss legal options to resolve the Goods and Services Tax (GST) compensation cess issue with the Centre, days after Union finance minister Nirmala Sitharaman clarified that the central government will borrow ₹1.1 lakh crore from the market on behalf of the states and pass the same as a loan to them.
HT reported on Saturday that with the Centre agreeing to borrow ₹1.1 lakh crore from a special window of the Reserve Bank of India (RBI) and on-lend it to the states, some of the seven states that disagreed to the initial plan could now sign on. Their main concern was higher interest costs if individual states approached market separately.
“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 tweeted Saturday.
A Union finance ministry official said the Centre and the GST Council, the apex federal body for the indirect 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 said, requesting anonymity.
On August 27, the Centre gave states the choice of borrowing ₹97,000 crore (the shortfall resulting from GST implementation issues) without having to pay principal or interest or the entire ₹2.35 lakh crore revenue deficit from the tax projected for this fiscal year. The ₹97,000-crore amount was subsequently raised to ₹1.1 lakh crore on October 5. Some states objected and insisted the borrowing would have to be done by the Centre.
While 10 states originally opposed the plan, this number came down to seven by Wednesday, with some saying they would consider legal options. The seven dissenting states are Chhattisgarh, Jharkhand, Kerala, Punjab, Rajasthan, Telangana and West Bengal. Puducherry earlier indicated its preference for the borrowing option, but the Department of Expenditure was yet to receive a formal communication, the official said.
The official said that all states would eventually agree as there is “no dispute” and the GST Council is committed to resolving “all differences”. “Borrowing of ₹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 said.
The GST Council is a federal body, chaired by Union finance minister, and members include finance ministers of the states. Until the recent controversy, all its decisions were taken on the basis of a consensus.
The Centre’s decision Thursday followed by Sitharaman’s letter to states softened the stand of some dissenting states, a state government official said on condition of anonymity.
Sitharaman 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 Government will arrange the borrowing in such a manner that cost will be at, or close to, interest rate of Union Government.”