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How borrowing options narrowly missed being put to a vote in GST Council meeting
October, 07th 2020

At the beginning of the 42nd GST Council meeting, the Centre was confident that it had the numbers to have a favourable result on the borrowing options. However, things changed during the discussions, and the government officials were soon found to be trying to force the meeting to a close

In perhaps one of the most dramatic Goods and Services Tax (GST) Council meetings held on October 5, the council nearly came to a point of putting the borrowing options given to states to a vote due a lack of consensus.

At the beginning of the meeting, the Centre was confident that it had the numbers to have a favourable result on the borrowing options. However, things changed during the discussions, and the government officials were soon found to be trying to force the meeting to a close.

Things came to point where a minister from the Bharatiya Janata Party-led state government had to intervene. The minister told the Centre that no decision can be arrived at without a consensus on the issue and that the council should meet again to discuss it.

 

"There was a lot of chaos. It was a long meeting and the opposition-ruled states were firm on their stand. In fact, they managed to convince two other states to push for a third borrowing option," a person aware of the discussions told Moneycontrol.

  

Non-BJP states like West Bengal, Kerala, and Chhattisgarh conveyed to the Centre that it has constitutional obligations to compensate states fully for any shortfall in tax collections due to the implementation of the GST.

"The finance secretary's (Ajay Bhushan Pandey's) abrupt decision to close the meeting and announce that the department (of economic affairs) would oversee borrowings by states, when the deliberations were still on, made states very angry. Andhra Pradesh and Puducherry, which the Centre had said were on its side, then said it's actually the Centre that should borrow," the official said.

"The Centre was immediately put on the backfoot as it was no longer sure of having the required numbers. The issue narrowly missed being put to a vote because the Centre no longer had muscle," the official said.

On the advice of a minister from a BJP-ruled state, Finance Minister Nirmala Sitharaman assured other states that no decision on the issue would take place without a consensus.

Consequently, the council decided to meet again on October 12 to discuss the same.

The council extended the levy GST compensation cess on luxury goods like cars and tobacco products beyond 2022.

The Centre had in the last GST Council meeting offered two borrowing options to states. Under the first option, the Centre in consultation with the Reserve Bank of India (RBI) would provide a special window to states to borrow Rs 97,000 crore at a reasonable rate of interest and this money could be repaid after five years from the collection of cess.

The other option was that states could borrow entire GST compensation gap of Rs 2.35 lakh crore in FY21 in consultation with the RBI.

When the GST was implemented in 2017, the Centre had promised to compensate states for any revenue loss for five years from a pool created by levying cess over and above the GST on luxury and sin goods.

This pool generated a surplus in the first two years and had a deficit in FY20 as well as in FY21.

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