Borrow from RBI to bridge GST gap, Centre tells States

Pandemic an act of God, says Nirmala Sitharaman; States want 7 days to consider options.

Union Finance Minister Nirmala Sitharaman with MoS for Finance Anurag Thakur at the 41st GST council meeting via video conferencing, in New Delhi on August 27, 2020.

The Centre on Thursday acknowledged that States are likely to face a GST revenue gap of ₹3 lakh crore this year, as the economy may contract due to COVID-19, which Finance Minister Nirmala Sitharaman termed an unforeseen “act of God”.

At the GST Council meeting, the Centre distinguished between the shortfall due to GST implementation itself — claiming that this is the portion “hardwired” into the compensation law — and that caused by the impact of COVID-19. It offered two options for borrowing by States to meet the shortfall, and has given them seven days to consider the proposal, Ms. Sitharaman told journalists after the Council meeting.

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Finance Ministers from Congress-ruled States, also speaking to journalists after the meeting, said they were unhappy with the outcome, as the Centre was not honouring its commitment to pay full compensation to revenue-starved States.

Alleging a “trust deficit” between the Centre and States, they asked why the former could not borrow money to compensate the States, adding that the proposed solution of borrowing by States should not be forced on them.

“This year, we are facing an extraordinary situation,” said Ms. Sitharaman. “You are facing an act of God, which might even result in a contraction of the economy — to what per cent or whatever, I am not getting into.” 

The Minister added that the GST Compensation Act, 2017 “did not foresee an act of God.”

That law guaranteed States that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods. However, the economic slowdown has pushed both GST and cess collections down over the last year, resulting in a 40% gap last year between the compensation paid and cess collected.

As per the Centre’s estimates, the States’ GST revenue gap in 2020-21 will amount to about ₹3 lakh crore, while cess collections are only projected to reach ₹65,000 crore, leaving a shortfall of ₹2.35 lakh crore.

The Centre has calculated that only ₹97,000 crore of the shortfall is due to GST implementation itself, while the rest is due to the impact of COVID-19, said Finance Secretary Ajay Bhushan Pandey. The Finance Minister described this ₹97,000 crore as “that portion which is strictly hardwired in the [Compensation] Act”.

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Mr. Pandey cited legal opinion from the Attorney General, to say that although “protected revenue” has to be protected, the compensation gap must be met from the cess fund through the levy of cess, and “cannot be met from the Consolidated Fund of India.” Instead, the AG suggested that the compensation levy can be extended beyond five years, to meet this shortfall.

Keeping this in mind, two options were presented to the Council. “A special window could be provided, in consultation with the RBI, so that the States can get this ₹97,000 crore at a reasonable rate of interest, and this amount can be repaid after five years through the collection of cess,” said Mr. Pandey. “Another option is that this entire gap of ₹2.35 lakh crore can be met by the borrowing by the States. There also, arrangement could be made with the RBI and certain facilities could be provided.”

Ms. Sitharaman added that for States choosing the first option, she would be willing to remove conditions around a further 0.5% relaxation in States’ borrowing limits under the FRBM Act.

States have asked for seven working days to consider the detailed proposals. Another meeting of the Council may be held after that, said Mr. Pandey.

Ms. Sitharaman said there was no discussion on increasing tax rates during the meeting. She expressed gratitude that there was no attempt to politicise the issue within the Council, adding that “States behaved like statesmen”. However, outside the Council meeting, parties were politicising the issue, she said.