Full compensation to states, says govt ahead of Sept 10 meet

Ahead of Thursday’s special meeting, finance ministry sources reiterated that that the entire shortfall of compensation to states, irrespective of whether it is on account of goods and services tax (GST) implementation or the Covid-19 pandemic, will be compensated.

The Council meeting will take a call on the borrowing options given by the Centre to meet the compensation gap of the states. Ministry sources also ruled out borrowing by the Centre as suggested by some states with some saying that under the GST law, the compensation cess is a tax owned by the states under Article 292 of the Constitution. The Centre can borrow on the security of its own taxes and resources which is Consolidated Fund of India. “It cannot borrow in the security of the tax which it does not own,” sources said.

The ministry estimated that there would be a compensation requirement of ~3 trillion for states and the compensation cess would be around ~65,000 crore for the current fiscal year, leaving a gap of ~2.35 trillion. Of this gap, ~97,000 crore is on account of GST structure and the remaining due to the lockdown to arrest the spread of Covid-19.

“It has never been the stand of Union

MINISTRY SOURCES HAVE RULED OUT BORROWING BY THE CENTRE AS SUGGESTED BY SOME STATES, SAYING THAT UNDER THE GST LAW, THE COMPENSATION CESS IS A TAX OWNED BY THE STATES UNDER ARTICLE 292 OF THE CONSTITUTION

finance minister (Nirmala Sitharaman) that the loss of revenue due to Covid would not be compensated. The Central government has, time and again, committed that the entitlement of the states would always be for full compensation,” a key finance ministry source said. He said the entire compensation sum on account of shortfall would be paid and honoured.

As such, the Centre offered two solutions to the state governments. The first is that states take a ~97,000-crore window, to be worked out with the Reserve Bank of India, or borrow ~2.35 trillion from the markets to be facilitated by the central bank.

The amount will be paid by the compensation cess, which will be extended beyond June 30. However, states will have to bear the interest burden if they decide to borrow the entire ~2.35-trillion shortfall.

In case of the second option, proposed extension of cess will be used for paying only the principal amount and not interest. While in the first case, borrowing under the special window will not be treated as debt of states, in case of second option, only the amount up to ~97,000 crore, which is the shortfall arising due to GST implementation, will not be treated as debt. The states were given time till Tuesday to send their feedback, after which the GST Council meeting will be called to take up the matter.

Reaction to the offer from states has so far come on party lines. While the Opposition-ruled states such as West Bengal, Punjab, and Kerala accused the Centre of reneging on their promise, some Bjp-ruled states such as Bihar and Karnataka opted for the first option.

While giving the two options, the ministry had stated in the note that to the extent the shortfall is not made good, the states would still be eligible to get it in arrears after the transition period through extension of the cess, if so decided by the Council. The source cited above referred to the note.