Centre says States can repay loan after 5 years from collection of GST to make up for Rs 2.35 lakh crore deficit this fiscal
Calling Covid-19 as an extraordinary “Act of God” situation, Finance Minister Nirmala Sitharaman has said this may lead to economic contraction and presented two options to States under which they can borrow from the market to make up for the estimated deficit of Rs 2.35 lakh crore this fiscal. The non-NDA States were not satisfied with the Government’s offer.
With the States clamouring for compensation of GST revenue shortfall, the Centre on Thursday held a five-hour long meeting of the GST Council in which the Finance Minister said there was no proposal to raise tax rates to make up for the shortfall that has been compounded by the Covid-19 pandemic.
Citing a legal opinion from the Attorney General, she ruled out the Centre making good the shortfall from either its coffers or borrowing against its balance sheet.
The deficit can be made good by States borrowing using a special window, she said, adding this loan can be repaid after five years from the collection of GST cess. If States agree to either of the options, it would effectively mean that cess would continue beyond five years of the GST rollout. In 2017, all States agreed to subsume their local taxes such as VAT into the new, nationwide Goods and Services Tax (GST) in return for the Centre promising to make good any loss of revenue in the first five years.
But with the economy slowing down, Rs 70,000 crore shortfall was seen in the last fiscal and this year it is estimated to widen to Rs 2.35 lakh crore.
The Congress said it was “dissatisfied” with the outcome of the GST Council meeting and accused the Centre of adopting a majoritarian approach and thrusting “solutions” on States.
The Finance Ministers of Congress-ruled States are not happy with the outcome of GST Council meeting as decisions were thrust upon them by the Centre, Punjab’s FM Manpreet Badal said at a virtual press conference after the GST Council meeting.
Puducherry Chief Minister V Narayanasamy, who represented the Union Territory at the meeting as he also holds the finance portfolio, said it is unfortunate the Centre was not helping the revenue-starved States by honouring its commitment to pay them GST compensation at 14 per cent.
Chhattisgarh Finance Minister TS Singh Deo said there is a sad state of affairs in the GST Council as it is increasingly yielding to majoritarianism instead of being consensual.
Delhi Deputy Chief Minister Manish Sisodia said that under the existing system, the city Government cannot take a loan from the RBI to meet its revenue shortfall. Emerging out of a GST Council meeting, he said the Centre has refused to pay GST compensation to States and asked them to take a loan from the RBI to meet their revenue shortfall due to the coronavirus pandemic.
“However, under the current hybrid system (of governance), the Delhi Government cannot take a loan from the RBI. The Centre should take a loan from the RBI and give it to the Delhi Government,” he said.
Sisodia also charged the Centre with failing to fulfil its promise to the States at the launch of the Goods and Services Tax (GST) regime four years ago. “The Centre had promised that it will pay GST compensation to States at the rate of 14 per cent for five years in case of revenue shortfall,” said Sisodia.
“But, today at the GST Council meeting, the Centre refused it, saying there was no provision for compensation in situation like a pandemic,” Sisodia said in a briefing.
Telangana Finance Minister Harish Rao who participated in the GST Council meeting said States have lost 60-70 per cent of their tax revenues after joining the GST regime while the Centres loss was pegged at 31 per cent only.
According to an official release, Telangana demanded that the Group of Ministers headed by Bihar Deputy Chief Minister Sushil Kumar Modi on the Integrated GST to finalise the modalities and release Telangana’s due share of Rs 2,700 crore towards IGST.
Revenue Secretary Ajay Bhushan Pandey said out of this amount, only about Rs 97,000 crore is attributable to the implementation of GST, while the rest in on account of the coronavirus pandemic hitting the economy.
Pandey, who is also the Finance Secretary, said while GST collections have been impacted by the pandemic this year, there was a shortfall of Rs 70,000 crore in 2019-20 (April 2019 to March 2020) which was made good from the surplus of previous two years.
When GST was implemented in 2017, the Centre had promised to compensate States for any revenue loss for five years from a pool created by levying cess over and above the GST on luxury and sin goods.
This cess pool generated a surplus in the first two years but witnessed a deficit in FY20 as well as the current fiscal.
Detailing the options presented to the States, Sitharaman said the Centre, in consultation with the RBI, will provide a special window to States to borrow Rs 97,000 crore at a reasonable rate of interest. This money can be repaid after five years from the collection of cess.
The other option is that the States borrow the entire GST compensation gap of Rs 2,35,000 crore through the special window. The States have seven working days to decide which option they want, she added.
Sitharaman said “the interest from borrowing would be repaid from the cess collected in the years beyond the first five years of GST implementation.”
“There will be no additional burden on the States,” she said, adding the States have been asked to borrow through the RBI to ensure they do not rush for the borrowing and there is no hardening of bond yields.
The Minister said the GST Council decided that the borrowing arrangement would be for the current fiscal and a review would be done at the beginning of the next financial year.