The Centre is not in the mood for a confrontation with States that are opposing its proposals on GST compensation and is hopeful that they will examine them and accept them as the “best possible options” in the current circumstances.
“We hope that [these] States understand that this is the best possible option. The Revenue and Expenditure secretaries will have a video conference with State finance secretaries on September 1 which will clarify doubts of the States,” said a top official in the Finance Ministry.
No burden on States
There will be no burden on the States as the repayments for the loan will be paid from the proceeds of the compensation cess, which can be extended beyond June 2022. Asked specifically if the Centre was prepared for a debate and vote on the proposals at the next GST Council meeting if it came to that, the official said the Centre did not want to “take that route” and would rather talk it out with the States.
The anticipated shortfall in cess collections is ₹2.35-lakh crore this fiscal of which the Centre has determined that ₹97,000 crore is what it calls the deficit under the “letter and spirit” of the GST Act. The balance ₹1.38-lakh crore is attributable to extraordinary circumstances caused by Covid-19.
The official explained that the calculations for determining the figure of ₹97,000 crore were based on the Budget assumption of 10 per cent GDP growth and a tax buoyancy of 1 (See table). Asked why could the Centre not borrow on its account, as the Opposition States have demanded, the official said that it would drive up G-Sec yields in the market making borrowings dearer for all, including the States themselves and even private borrowers.
Besides, the fiscal deficit will soar as the shortfall of ₹2.35-lakh crore accounts for 1.15 per cent of GDP. The Centre would also like to keep the powder dry for future borrowings as there is no saying how the pandemic will play out in the next few months.
“Legally, we’re bound to pay the entire shortfall of ₹2.35 lakh crore and we stand by that. But we don’t have the funds and the Consolidated Fund cannot be used, which means we have to borrow. Deliberations in early meetings of the GST Council clearly put the onus on the council to borrow when there is a shortfall. Then the question is: who will borrow and who’ll repay? We’re asking the States to borrow. There will be no repayment burden on them as it will be taken care of by the cess proceeds,” explained the official. State borrowings done in a planned way will not drive up market yields and their borrowing limits have also been relaxed by 0.5 percentage point. Pointing out that these are trying times for all including the Centre, the official said that the Centre’s revenue, which also comes from the “same ground as the States”, has also been hit badly. Despite the dire situation, the Centre has been meeting its commitments to the States without exception.