Govt proposes to revise Option 1, Oppn states may table 3rd option
Ahead of the crucial Goods and Services Tax (GST) Council meeting on Monday, the Centre has proposed to increase the interest-free borrowing limit for states to ~1.1 trillion through the special window of the Reserve Bank of India to make up for the compensation shortfall, up from ~97,000 crore it had proposed earlier.
On the request of a few states, it has lowered the GST growth forecast to 7 per cent, from 10 per cent estimated earlier.
However, unimpressed, the key Opposition-ruled states are likely to reject both borrowing options proposed by the Centre to meet the compensation and will seek a consensus on a third alternative based on two “non-negotiable” principles.
Deepening the divide, the states ruled by the Bharatiya Janata Party and its allies, on the other hand, may press for expediting the borrowing process for states that have picked either of the two options.
Meanwhile, the Centre is likely to propose extending the compensation cess period by another two years beyond June 2022.
The dissenting states will seek a consensus on two broad principles, which will emerge to be the third alternative. One, the revenue shortfall that has happened should not be estimated separately on account of Covid-19 and GST implementation. Two, the compensation cannot be linked to the normal borrowing or additional borrowing limits allowed for the states.
Kerala Finance Minister Thomas Isaac told Business Standard that based on the two basic principles, a consensus could be arrived on other things, including who would borrow and how much was to be borrowed immediately. “The Centre must accept that the shortfall needs to be compensated without affecting the states’ normal or additional borrowing limits. Once these two basic principles are accepted we can decide how and who should borrow, whether the Centre or the state and in what proportion,” said Isaac.
A discussion can also take place on the amount that needs to be borrowed this year and how much can be deferred for the period after 2022, said Isaac.
He also said the Centre should immediately give some compensation to the states hit hard by Covid. Punjab Finance Minister Manpreet Singh Badal said the dissenting states would press for a third option. “There is a third option we would like to build a consensus on. Besides, we will press for immediately operationalising the dispute resolution mechanism and appointment of a vice-chairman of the Council,” said Badal.
Meanwhile, Bihar Deputy Chief Minister Sushil Kumar Modi, in a letter to Union Finance Minister Nirmala Sitharaman, pressed for expediting the borrowing process to enable “cashstrapped” states to kick-start the development process, which came to a halt during the pandemic. “The process of borrowing too is expected to take time since arrangements will have to be made to create a special window through which the states can borrow with convenience,” Modi said in the letter.
The Union finance ministry has offered two solutions to states — borrow ~97,000 crore, which is the result of the shortfall owing to GST implementation through the special window facilitated by the RBI, or borrow the full shortfall in compensation (~2.35 trillion), which includes the impact of Covid-19, from the markets, to be facilitated by the central bank. The amounts will be paid by the compensation cess, which will extend beyond June 30, 2022. In the case of the second option, the proposed extension of cess will be used for paying only the principal, not the interest.
Meanwhile, the fitment panel is learnt to have rejected the proposal of reducing the GST rate on hand sanitizers with ayurvedic or unani ingredients from 18 per cent to 12 per cent.