GST shortfall: 21 states agree to borrow; others may lose aid, says Centre

With as many as 21 states/UTs agreeing to borrow to bridge their GST revenue shortfall under the incentivised Option 1, the Centre has toughened its stance and indicated to the dissident states that if they don’t fall in line before the scheduled GST Council meet on October 5, then they would have to wait till June 2022 to get their compensation dues.

According to the GST Act, the GST Council, with full presence of sates and UTs, requires a minimum of 20 states to pass any resolution, in case voting is required on any issue, an official source pointed out, signaling the Centre’s resolve to implement the plan for the states to borrow. The sources added that the non-compliant states even after June 2022, the non-complaint states getting the compensation will be subject to the Council extending the compensation cess collection period beyond 2022.

States that are yet to respond to the borrowing plan are Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana and West Bengal. These states have said the Centre, as the sovereign, should raise funds from the market to bridge the shortfall in the compensation cess funds.

Under the option 1, which entails total borrowings of Rs 97,000 crore by all states combined (the shortfall estimated of just GST implementation), the Centre will facilitate the process through the RBI’s single window “at the lowest possible single rate interest to all the States/UTS as per their individual choice”. The other option envisages the states borrowing to offset the entire GST shortfall of Rs 2.3 lakh crore in FY21, including the shortfall caused by Covid-19. The Centre has made it clear that both the options don’t undermine the commitment to compensate the states fully for the GST shortfall.

However, the dissident states reckon that the borrowing plans are a breach of trust and amounts to the Centre’s reneging on its promise that any shortfall from its their protected revenue level will be fully compensated in the first five years of GST, that is, till June 2022. Former finance minister P Chidambaram wrote in FE on Sunday: The ‘two options’ given by the Centre to the states to borrow is an act of deceit.

There is a hole in every State’s revenue budget for the current year. The borrowing will fill the hole but will be shown as a debt in the capital account of the State, which the State has to service by paying interest and eventually repay the debt. If the State does not borrow and the Centre will not provide the compensation the hole will remain a hole and, inevitably, the State will cut its capital expenditure or welfare expenditure in the current year — neither of which is desirable.”
The 21 states that have decided to exercise the Option 1 are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh.

The Option 1 means that rates would be close to G-sec and interest and principle burden is to be borne by fund from compensation cess collected after June 2022. The borrowing would not be treated as debt on states’ books. The Option 2 requires a part of the amount borrowed to be treated as debt in states’ books while they will have to bear the burden of interest payment. Also, choosing this option closes the doors on carrying forward the unutilised part of additional borrowing to next financial year.

The states not agreeing to both options point out that since the GST compensation was meant to be an income for them, any cost thereof can’t be borne by them.