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Dissenting states likely to accept GST solution
October, 17th 2020

The officials added that the Goods and Services Tax (GST) Council could, based on revenue flows over the next few months, review the quantum of borrowing.

With the Centre agreeing to borrow ₹1.1 lakh crore from a special window of the Reserve Bank of India and on-lend it to the states, some of the seven states that are yet to agree to the plan may now sign on, government officials with direct knowledge of the matter said on Friday.

The only contentious issue left is the remaining ₹1.25 lakh gap in compensation. As GST revenues increase , this might end up being only ₹70,000 crore in 2020-21 (in addition to the ₹1.1 lakh crore), two officials belonging to different dissenting states and one working for the Union finance ministry said on condition of anonymity.

“The Centre’s decision to borrow from the market and pass the same to the states as a back-to-back loan is in the spirit of cooperative federalism. That addressed our immediate concern. Later, GST Council may always review the financial position and take necessary steps on a similar principle,” one of the state government officials added.

The seven dissenting states are Chhattisgarh, Jharkhand, Kerala, Punjab, Rajasthan, Telangana and West Bengal. Puducherry had earlier indicated its preference for the borrowing option, but the Department of Expenditure is yet to receive a formal communication, the third official, who works in the Union finance ministry, said.

Sitharaman on Thursday wrote to the states: “I am also sensitive to the fact that States need to be protected from the adverse consequences of higher borrowing in the form of interest liability and addition to debt. Under Option-I the Union Government will arrange the borrowing in such a manner that the cost will be at, or close to, interest rate of the Union Government.”


The finance minister’s letter said the Central government faces “very serious” budgetary constraints. “Long-term macroeconomic stability is the responsibility of the Centre; but it is also in the interest of the States who are partners in our system of cooperative federalism. The bona fide opinion of the Central government on this macroeconomic issue is that borrowing on the books of Centre will not be optimal in the national interest,” Sitharaman wrote.

She assured state governments that the entire arrears of compensation will “eventually” be paid to states. She thanked states for their “collaborative” approach that resulted in a “constructive and practical solution” to this issue of compensation cess.

The GST Council, on October 5, unanimously extended the levy of compensation cess beyond June 2022 till such time the states are compensated for their assured revenue shortfall. At the time the new tax regime was introduced in July 2017, the GST law assured states a 14% increase in their annual revenue for five years (up to June 30, 2022); any revenue shortfall should be made good through the compensation cess levied on luxury and sin goods such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products. The cess would have ceased to exist after June 30, 2022, without the Council’s decision to extend it.

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