The Centre clarifies about honouring the GST Compensation Dues

The Centre clarifies that it would honour its obligation to compensate the state governments for the GST compensation collection shortfall. A part of the compensation offered to states will be paid out immediately, amounting to Rs 97,000 crore.

A senior government official this week was interviewed by reporters of the Livemint publication. The official said that despite a strain on its finances due to the pandemic, the Union Government made this clarification. The balance due shall be paid over a period as decided by the GST Council.

The Union Government’s clarification comes just days before the next 42nd meeting of the GST Council may happen on 19th September 2020. Suppose states come in support of the new plan. In that case, the uncanny showdown seen in the previous 41st GST Council meeting between the Center and the states could have been avoided. It had resulted in the questioning of the cooperative federalism of the GST Council.

In that meeting, the states were given two funding options to cover either GST implementation revenue losses, or the entire deficit, including the pandemic effect. The possibilities included states borrowing under various conditions, either under a special RBI window or from the market.

The initial payout will be made immediately through borrowing, as this payment will have to be made during the GST’s five-year transition period. The default arising due to COVID-19 will be payable if and when the period of cess collection is extended. The states can avoid a fiscal roadblock after the compensation term ends in 2022 if the borrowings can be cleared through an extension in the collection of cess after the fifth year.

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Notably, the Union Finance Minister, Smt Nirmala Sitharaman had made a statement in an interview with the Mint publication earlier. She said that as long as the GST (Compensation to States) Act, 2017 exists, it had to be honoured by the Hon’ble Union FM.

The official being referred above said that the Centre convened a meeting of state finance secretaries last week to explain their position. The Union government ran through the options discussed with the states in the previously called GST Council meeting for a single agenda.

The Center would prefer the states to borrow and in turn finance the payout as per law. The cess collections accrue to states, and only they can borrow using it as a security. Also, states so far have borrowed just 1.2% of gross State Domestic Product (SDP) as against the approved borrowing limit of 5%.

The Center has initiated a conversation with the Reserve Bank of India to open a special window in which all states can easily access loans at the same cost. It will have to be seen if the Centre’s outstretched hands will mollify the states to restart the negotiations.

For any clarifications/feedback on the topic, please contact the writer at annapoorna.m@cleartax.in

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