Crux Of GST Council Meet: Centre Tells States ‘We Owe You Money But Borrow From RBI’

Here is a bizarre situation: The Centre owes money to the States on account of compensation for shortfall in GST collections of the order of Rs 3 lakh crore. In the middle of Covid-19 firefight, the Centre tells the States, “I can only pay Rs 65,000 crore, so I have a solution. You go and borrow the remainder Rs 2.35 lakh crore from the RBI and repay it after five years when I pay your dues. On my part, I will put in a word to RBI.”

The Centre, who owes money to the States in the first place, also does a big 'favour' to the latter by stating, “I would get you the loan at the best rates.” This is ‘ingenuity’ on part of the Centre. Under the GST law, which came about after amending the Constitution and became effective from July 2017, the Centre is bound to compensate the states for any shortfall in the assured level of revenue for five years after launch of Goods and Services Tax. It was this assurance, provided by the law, that had prompted the states to come on board under a dispensation that subsumed 17 different taxes (mostly in the states' purview). 

It was built into a system that the shortfall in the tax revenue had to be made up by levy of special cess on the luxury goods or so-called 'sin goods' over and above the top bracket of 28 per cent. This had to end after five years in 2022 and the cess was not to continue thereafter. 

But now two things would happen: the States would not get the compensation for the shortfall in revenue (they can only borrow) and the cess would continue well beyond 2022. The burden is clearly on the consumers (indirect tax payers) and the States. But the Centre has an explanation: ''The gap arising in compensation (is) due to the extraordinary situation and ‘Act of God’ in the form of Covid-19.” Force Majeure between the Centre and the States!  

That is what has been essentially proposed by Finance Minister Nirmala Sitharaman, who is also the Chairperson of the GST Council which met, digitally, on August 27.

States are rightfully turning back and non-BJP ruled states are doing so openly. The bottomline is that both the Centre and the states are broke. The Centre, instead of hand-holding the states, which are at the forefront of fighting the deadly virus, wants the additional debt burden on the shoulders of the latter for an amount it owes to them.

The GST Council had a good history of decisions by consensus, thanks to former Finance Minister late Arun Jaitley, gifted with his ability to listen and be listened to. But the state finance ministers, whether Thomas Isaac from Kerala or Amit Mitra from West Bengal, have issues not only with the outcome of the last GST Council meeting in the form of proposal, but also the manner in which it went about. In a television interview, Isaac went to the extent of saying it was “manipulated”. 

The RBI itself should be more comfortable lending to the Centre than different states which are in different financial health. Some are completely broke. 

In any case, the nation has to bear the burden of debt either way -- whether the borrowing is done by the Centre or the States. Common citizen understands the precarious financial state arising out of the complete lockdown and then partial lockdown, followed by restrictions at different levels of administration. The need of cooperative federalism is: if borrowing has to be done, it must fall upon the head of the family -- the Centre. But the  burden will fall on the taxpayers, anyways.