Both options allow full GST compensation for states,Centre clarifies

Business & Economics


The sources said that since the compensation cess is a tax owned by the states and under Article 292 of the Constitution of India, the Centre cannot borrow in the security of that tax.

Under both the borrowing options proposed by the Centre, the states governments’ entire GST shortfall – including the part caused by the pandemic – will be fully compensated, official sources clarified. They refuted reports in section of the media that if states go for the first option and borrow Rs 97,000 crore (shortfall computed just on account of GST implementation), the pandemic-related part of shortfall would not be offset. “This (first) option does not mean they will have to forego the remaining (pandemic-induced) compensation,” the sources asserted. The balance compensation will be paid to states after the above borrowing has been fully repaid.

The sources said that since the compensation cess is a tax owned by the states and under Article 292 of the Constitution of India, the Centre cannot borrow in the security of that tax. Compensation cess is a resource dedicated to states and only states can borrow on the strength of future flows from cess, which will eventually get credited to the consolidated Fund of States. Also, partially meeting the resource gap through borrowing is not only beneficial for the market but also for the States.

The sources also said that even though the government has already enhanced the borrowing limit for states in FY21 from 3% to 5 % of GSDP, on an average the states have borrowed so far only about 1.25 % of the GSDP. Only a few states have reached around above 2% of the GSDP. Therefore, enough headroom is available to the states to borrow as per their requirements and needs.

However, the fact remains that the additional revenue slippage on account of Covid-19, an event that was not foreseen once the states were offered a guaranteed revenue level under GST, could be addressed only with a cost to them. The revenue shortfall caused merely by GST implementation will only be bridged without a cost to the states.

 

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