The Centre has informed states that the estimated shortfall of Rs. 2.35 lakh crore this fiscal year can be met by borrowing from the market against future tax revenues.
Union Finance Minister, Nirmala Sitharaman stated that there was no proposal to raise tax rates to make up for the shortfall that has been aggravated by the COVID-19 pandemic hitting economic activity.
Sitharaman has cited a legal opinion from the Attorney General, eliminating the option of the Centre making up for the shortfall from either its coffers or by borrowing on its balance sheet. The Centre has also made a distinction between revenue lost due to implementation of the GST and the economic slowdown arising out of the COVID crisis. The government said its legal obligation was only to compensate states arising out of the GST rollout.
The Centre has given two options for borrowing by states so as to meet estimated GST compensation shortfall of this year.
The two options are:
1) A special window can be provided to the states in consultation with the RBI at a reasonable interest rate for the borrowing of Rs 97000 crore. The amount can be repaid after five years (of GST implementation) ending 2022 from cess collection.
2) The states can borrow the entire Rs. 2.35 lakh crore shortfalls under the special window.
If the states agree to either of the options, it would effectively mean that cess would continue beyond five years of GST rollout.
Meanwhile, the cash strapped Goa Government has asked the Centre to release the Rs 1080 crore of GST compensation due to Goa from the Rs 11000 crore that the Centre has in its kitty of GST cess, on an urgent basis.
State Transport Minister, Mauvin Godinho, after the GST council meeting, stated that the State has sought immediate disbursement of the pending dues.
Godinho said, “Our plea was simple. Bigger states like Maharashtra have pending dues of Rs 22000 crore and more, but Goa’s dues are just 5% of this”
Godinho further stated that Goa is disinclined to higher market borrowings at high-interest rates as it would put the State in a “debt trap”.
“We will brief the chief minister and we will choose the option. Most of the states will opt for option 2 where the centre will do the borrowing on behalf of the state and it will be repaid along with interest from the cess collected”, Godinho added.
He also mentioned that the Centre has agreed to extend the GST transition period beyond five years for another three years.
Godinho said that a meeting will be held in early September to note the decisions taken by various states and decide how to raise the amount to collect the shortfall in the compensation cess, what was the rightful due of the states and this would probably necessitate a change in the law.
While states like Goa were more muffled in their criticism, non-NDA ruled states were against the Centre’s move to ask states to borrow and meet the deficit.
“The revenue shortfall in GST collections has to be compensated by the Centre, this is the law. It is a constitutional provision. All states have made this demand that the Centre should release the compensation to those states that have not been paid,” said Godinho.
Subsequently, in the third week of September, the GST council will meet once again to review matters.
In 2017, all states agreed to link their local taxes such as VAT into the new nationwide goods and services tax 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 70000 crore-shortfall was seen in the last fiscal year and this year it is estimated to widen to Rs. 2.35 lakh crore.
