Govt to push for market borrowing at GST meet
REVENUE SHORTFALL States are likely to seek GST compensation from the Centre today
NEWDELHI:THURSDAY’S scheduled meeting of the Goods and Services Tax (GST) Council is expected to be stormy, with the Centre likely to push for a market borrowing mechanism that will leverage states’ recently enhanced borrowing limits to temporarily plug the hole in their finances caused by a shortfall in revenue and the Centre’s inability to compensate them -- and states ruled by non-national Democratic Alliance parties likely to, in turn, push for the compensation itself.
According to two government officials familiar with the matter, debt raised from market borrowings will be repaid from the compensation cess fund.
Other options, such as levying cess on more items, increasing cess rates on existing products or raising overall GST rates to raise revenue appear difficult at a time when demand is already subdued and the economy is badly hit by the Covid-19 pandemic, the officials said, asking not to be named.
States aren’t likely to accept this without argument.
In a letter to finance minister Nirmala Sitharaman on Wednesday, West Bengal finance minister Amit Mitra said, “It is surprising that the constitutional guarantee given to the States is being interpreted in a manner that the Centre is not responsible to compensate the States and it is the States (in the GST Council) which will have to find means to compensate themselves!”
The Union finance minister chairs the council, which includes state finance ministers.
The special meeting of the council has been convened to discuss how to compensate states for their revenue shortfall at a time when the economy is facing headwinds and the compensation cess kitty for 2020-21 is almost empty, the officials said.
The GST law assures states a 14% increase in their annual revenue for five years from July 1, 2017, and also guarantees them that their revenue shortfall, if any, will be made good through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal and tobacco products.
As cess collection fell sharply due to subdued business activities, states could not be paid compensation on time. According to official data, the last tranche of the GST compensation worth ~13,806 crore for 2019-20 was paid towards end of July. So far, states have been paid ~1,65,302 crore GST compensation for 2019-20 against total 95,444 crore cess collection for the fiscal year.
“With promised 14% year-onyear revenue growth, the gap is expected to be unmanageable this financial year without borrowing from the market,” one of the officials said.
The compensation requirement for 2020-21 is expected to exceed ~1.88 lakh crore even if the GST collection in 2020-21 remains at the same level as last fiscal year, he added.
Some states have a misconception that it is the commitment of the Union government to compensate states, therefore, the central government should borrow the money to pay compensation to states and union territories, the officials mentioned above added. Paying compensation is the collective commitment of both Union and state government, and the GST Council is the apex body that will take a decision on this matter, they said.
“The GST law is clear that states will be compensated for their revenue shortfall only from the compensation cess fund. There is no legal provision that the compensation money will come either from the Consolidated Fund of India or the Union government will borrow from the market. Therefore, this matter will be resolved at the GST Council on the principle of collective responsibility. Ideally, states should leverage their enhanced borrowing limits,” the second official said.
Mitra’s letter suggests otherwise. “Nothing can be more damaging, unfair and unjust than this. Those who are forwarding such views (on market borrowings) are either not aware of the spirit and intent of the Constitutional Amendment or are consciously turning a blind eye to renege the sovereign promise to the Sates,” he said in the letter reviewed by HT.
Mitra said there can be no going back on the fact that compensation has to be paid. The rate of 14% is also sacrosanct as it was unanimously decided by the GST Council, he added.
“Under no circumstances States should be asked to borrow from the market as it will increase their debt servicing liability. Further, it may lead to cut State expenditure which is not desirable at this juncture when the economy is witnessing severe recessionary trend,” he said.
In order to give fiscal space to states in this time of crisis, the Union government recently raised their borrowing limits.
Announcing the last tranche of ~20 lakh crore ‘Atamnirbhar Bharat Abhiyan’ (Self-reliant India Initiative) on May 17, finance Minister Nirmala Sitharaman said the Centre had also accepted the demand of states to raise their borrowing limit from 3% of their respective gross state domestic product (GSDP) to 5% that would give them additional resources of ~4.28 lakh crore during the Covid-19 crisis.
Experts say the shortfall in compensation cess collection is mainly because of unforeseen circumstances as the architects of the GST regime could not foresee a pandemic-like Covid-19 that would batter the economy. India is expected to report its Apriljune GDP numbers by the end of this month. Economists expect its economy to contract by at least 5% this year (2020-21).
Archit Gupta, founder and chief executive officer (CEO) of the financial technology platform Cleartax said, “Increasing state borrowing seems to be an option to fund the revenue shortfall for states. The other option suggested was to allow the GST Council to borrow, and repay from cess collection in future years.”
He, however, said that these measures were short term. “It is imperative that states need to becomemorefiscallyresponsible -- reduce their own debt and make attempts to become fiscally selfreliant to a large extent,” he added.
Pratik Jain, partner and leader of the indirect tax practice at PWC India said, “It is evident that cess collected is not enough to compensate the States, particularly in current economic slowdown due to the pandemic. However, at this point, neither increasing the rate of cess nor the ambit look like feasible options.”
He said, “Centre will need to negotiate the quantum of compensation, possibly by reducing the 14% annual increment and increasing the period of compensation beyond five years as initially envisaged. In the long term, we will have to find ways for the states to be more economically independent and enhance the tax base.”