GST Compensation Issue

Source: Indian Express

Context: Recently, the Centre has acceded to the states’ request, that it will borrow Rs 1.1 lakh crore to compensate them for the shortfall in their GST revenues.

What is the Background?

• For bringing the states in to GST ambit, The Centre assured the states of a 14 per cent growth in their GST revenues.
• It also agreed to compensate states for shortfall in GST revenue collection for 5 years.
• GST compensation was decided to pay out of Compensation Cess every two months by the Centre.
• Now, the pandemic impact has resulted in low Cess collection that has constrained Compensation to states.
• With expected revenue shortfall of Rs 3 lakh crore, the collections through the compensation cess stand at Rs 65,000 crore.
• Now, out of the shortfall of Rs 2.35 lakh crore the state governments are being compensated only for losses arising on account of implementation issues that is Rs 1.1 lakh crore.
• The states were asked to forgo the remaining loss in GST revenues (1.34 lakh crore) as it has  arised out of an “act of god”.

Why Centre has to borrow not the states?

• The Centre’s borrowing attracts a lower interest rate as compared to that of states.
• Also, the loans to the states will be at a uniform rate that will help them to avoid interest rate differentials across states.
• This mechanism is more preferable and convenient rather than all the states rushing to the bond market.

What are the unresolved issues?

• Increased debt: The mode of the transaction has not yet clearly defined. Irrespective of the mode of transaction, centre’s borrowing will lead to a rise in general government debt.
• Centres reluctance to borrow entire amount: The repayment of the loan is not an obligation of the Centre, and will be met from proceeds from future compensation cess collections still centre is reluctant to borrow the entire expected shortfall of Rs 2.35 lakh crore

The Centre’s decision to borrow Rs 1.1 lakh crore is in the spirit of cooperative federalism. Given the huge distress in the economy even the states should show some flexibility, in the spirit of cooperation. The GST Council should approach the issue of compensating states for their remaining losses in a conciliatory manner.