The GST Council is yet to resolve the issue of compensation to states on account of the forecast shortfall in revenue in the current financial year. The only issue which was resolved in Monday’s meeting is the decision to extend a special cess on some goods beyond 2022, to help pay for the current year’s estimated shortfall.

What is clear now is that the Centre is unwilling to borrow on its account and make good the shortfall of states. States now have to settle for a compensation which will not cover the actual shortfall or opt for a package where that may be covered if they borrow on their own account. If states opt for the second package, they have to bear the interest on the borrowing. In addition, as their quantum of borrowing has already been fixed by the Centre, they will find themselves squeezed when it comes to raising resources.

The law states that the GST Council will decide on what to do in the case of a shortfall in the Compensation Cess. However, as the Centre has a unilateral veto power, for all practical purposes it is the Centre which decides in such a situation. The unfortunate fallout is that the current friction in the GST Council may spill over to other areas and affect the pace and quality of economic reform in future. The Centre can still avoid it by upholding the spirit of cooperative federalism, and using its superior resource raising powers to compensate states fully.