New Delhi: The GST Council’s yet another marathon meeting for resolving the vexed issue of payment of GST compensation dues to States in the current financial year failed to end the deadlock as both the groups, the Centre and NDA ruled States on one hand, and the opposition ruled States, on the other hand, refused to budge from their respective positions.
In a late evening decision, the Centre Tuesday permitted 20 states to borrow an additional amount of Rs 68,825 crore. These 20 states have opted for the loan option-1 offered after the Centre expressed its inability to clear their GST Compensation Dues in the current fiscal.
In May this year, the department of expenditure has permitted an additional borrowing of 2% of a state’s GDP to deal with the adverse impact of Covid-19 global pandemic. The one-fourth of it, 0.5% of a state’s GDP, was linked to the state implementing some reforms as suggested by the Centre.
The Centre later waived this requirement for those states that would opt for the first loan option to meet the shortfall in their revenue collection because of implementation of GST.
On Tuesday, the Centre allowed 20 states to borrow an additional amount of Rs 68,825 crore through open market borrowings as they have become eligible to borrow an additional amount of 0.5% their GDP after they accepted the Centre’s first loan option to meet the shortfall in their revenue collection.
Finance ministry said the action on the special borrowing window is being taken separately.
GST Council meet fails to break the deadlock
A day before the Centre’s decision to permit 20 states to borrow an additional amount of Rs 68,825 crores, the GST Council’s meeting failed to break the logjam between the Centre and some opposition states.
“There is no consensus in the GST Council meeting on the issues where differences exist,” finance minister Nirmala Sitharaman announced on late Monday evening following an over five-hour long meeting.
“Majority of States opted for option one, many of them want speedy borrowing. They say we have to fight Corona,” Sitharaman said.
The Finance Minister said the Centre was going to help all those States who wanted to borrow.
“Some of them are going to approach us tomorrow (Tuesday) morning,” she said.
There are 21 States, primarily ruled by the BJP and its allies, including some other States, that have agreed to borrow as per the first loan option to meet the shortfall in their revenue collection this year. However, nearly 10 States have rejected the Centre’s loan offer, asking the Centre to borrow and clear their GST compensation dues.
Sitharaman also lamented the approach adopted by some States as in her view it amounted to holding back other States who wanted to borrow as per the option one.
“Does the collective conscience of the Council allow to hold back other States till the time there is unanimity, which I also seek,” Sitharaman said.
Opposition calls the loan option illegal
Kerala finance minister Thomas Isaac, who has emerged as one of the most vocal critics of the Centre’s loan options, was quick to criticise Sitharaman’s statement to the media.
“Union FM’s announcement that she is going to permit 21 states to borrow as per Option one is illegal. Option one involves deferment of compensation payment beyond 5 years for which a Council decision is necessary as per AG’s opinion. No such decision has been made in the Council,” Thomas Isaac said in a tweet.
“It is unfortunate that Union FM does not propose a decision in the Council or even make a statement what she is going to do but choose to make the announcement in the press conference. Why does Centre refuse to take a decision in Council? Total disregard for democratic norms,” Thomas Issac said.
GST Compensation to States Act 2017
Under the GST (Compensation to States) Act of 2017, the Union government is under a legal obligation to compensate States for any loss in their revenue collection for a transition period of five years. The amount of compensation is calculated by taking into account the projected year-on-year 14% growth in a state’s revenue collection over the base year of FY 2015-16.
Under the law, the Centre is required to clear GST Compensation dues of States on a bi-monthly basis and final GST dues for a fiscal are settled as determined by an audit of the CAG and then settled by the Centre.
The Centre is authorised to levy and collect a Cess on luxury and demerit goods to compensate States.
Sharp increase in GST Compensation Dues
In FY 2017-18, the Centre paid Rs 62,956 crores as GST compensation dues to states, which went up to Rs 95,081 crores in 2018-19, a jump of over 51%. However, the payment requirements were lower than the actual GST Cess collection, enabling the Centre to comfortably clear the GST dues to States in the first two fiscals.
In the last fiscal (FY 2019-20), the GST Compensation Payment requirement shot up to Rs 1.65 lakh crore, an increase of Rs 70,000 crore over the previous year. However, the Centre was able to manage it by utilising the surplus of the previous two financial years and also by transferring a part of IGST amount which it had transferred to the Consolidated Fund of India.
Alarming situation
Unlike the first three years, the situation reached an alarming level in the current fiscal due to a variety of reasons. The adverse impact of Covid-19 global pandemic devastated Indian economy, which was already in a slowdown mode for over two years.
During the lockdown, April-June period this year, India’s economy contracted by 23.9%, the sharpest among the major economies. It made it impossible for the Centre to meet its legal obligation to clear GST dues this year, which is expected to touch Rs 3 lakh crore against the projected collection of just Rs 65,000 crore. It would leave a gap of Rs 2.35 lakh crore.
In the first five months of this fiscal, the GST Compensation dues already touched Rs 1.51 lakh crore, and with the start of October, GST Dues for the month of September have also been added to this figure.
According to the rule of bi-monthly settlement, the GST dues for April-September have become due for the payment.
According to a senior official in the ministry of finance, another Rs 25,000 crores would have been added to the figure of Rs 1.51 lakh crore, taking the total GST compensation amount for the first six months to close to Rs 1.75 lakh crores.
“Every month, Rs 20,000 crore to Rs 25,000 crore is being added in the GST Compensation Dues,” the official told ETV Bharat.
As against this, the Centre has only released Rs 20,000 crore GST compensation dues to States in the current fiscal.
According to the latest official information shared by the government in the Lok Sabha last month, the provisional GST compensation Dues for April-August period was highest for Maharashtra at Rs 22,485 crore, followed by Karnataka (Rs 13,763 crore), Uttar Pradesh (Rs 11,742 crore), Gujarat (Rs 11,563 crore) and Tamil Nadu (Rs 11,269 crore).
