Tamil Nadu rejects Centre’s options for GST compensation

Chief Minister Edapaddi K. Palaniswami has written to Prime Minister Modi urging him agree to a mechanism in which the Centre would raise the required funds as a loan and lend it to the GST Compensation Fund against future cess receipts

August 31, 2020 01:58 pm | Updated 01:58 pm IST - CHENNAI

Chief Minister Edappadi K. Palaniswami

Chief Minister Edappadi K. Palaniswami

Displeased with both the options proposed by the Union Finance Minister for GST compensation to the States, Tamil Nadu Chief Minister Edapaddi K. Palaniswami on Monday wrote to Prime Minister Narendra Modi urging him to agree to a mechanism in which the Centre would raise the required funds as a loan and lend it to the GST Compensation Fund against future cess receipts.

“Our stance has consistently been that the Government of India has a moral and legal obligation to pay the compensation for the shortfall in GST collections. The argument that States borrowing for what is essentially a Government of India obligation is a seemingly better optical arrangement does not appear to be a strong or valid reason,” Mr Palaniswami contended. He requested Mr. Modi to direct the Union Finance Ministry to revisit their stance in the matter.

Under both the options suggested by the Centre, the States were required to borrow from the market to make good the shortfall in compensation due, which he argued was administratively difficult to implement and more expensive and moreover, the reasons being cited for such an arrangement were not persuasive. “Whether the Centre borrows or the State governments borrow, for rating agencies and others who monitor the macro-economic indicators, it is the overall general government deficit and borrowing that is relevant,” he contended.

The net impact of the Centre’s proposed two options was to reduce the overall resources available to States in 2020-21 quite substantially to the extent of about 1% of GDP amounting to nearly ₹2 lakh crore, he said: “This will really hurt spending by States on many crucial COVID-19 and non-COVID-19 related expenditure.”

The AIADMK government, which is an ally of the BJP also insisted that the PM should ensure that the States get their full dues of the compensation in the current year itself, and reduce neither the compensation payable nor the already announced and committed additional borrowing permissible to States of 2% of GSDP under the Atma Nirbhar Bharat stimulus package under any circumstances.

Mr. Palaniswami also requested the PM to direct the Union Finance Ministry to provide a formal and categorical assurance that any spillover of the compensation due would be paid in the period after March 31, 2022. He also requested the relaxation of the conditionalities attached to the permission to be accorded by the Centre to States to borrow under the Atma Nirbhar Bharat scheme.

“These measures will ensure that not only are States treated justly and fairly in the matter of being provided the due compensation for the revenue shortfall post implementation of GST, but will also have adequate funds in 2020-21 to meet their essential expenditure commitments, and can thus effectively contribute to the revival of the economy,” he said.

No compensation has been released for the shortfalls in revenue collection since April 1, 2020. As on date, a total sum of ₹12,250.50 crore was due to Tamil Nadu as compensation for the shortfall in GST collections, of which ₹11,459.37 crore has accrued from April to July, 2020.

Pointing to the expenses incurred due to COVID-19 in the State, Mr. Palaniswami said considerable additional expenditure of nearly ₹7,000 crore has already been incurred towards upgrading health facilities, providing medical supplies and towards relief measures for the most affected. “For the economy to restart effectively, State Governments also need to ensure that regular budgetary expenditure on on-going schemes and programmes picks up. Hence, State Governments are in immediate need of resources.” He also recalled his letters to the PM in this regard in the past few months.

Fisheries Minister D. Jayakumar had presented the Tamil Nadu government’s stand over the issue during the 41st GST Council meeting held on August 27 and had suggested that the Centre could mobilise resources and lend the funds required to the GST Compensation Fund and that loan could be serviced through an extension of the GST Cess for a few years beyond 2021-22. “This was a very reasonable and practical suggestion and was agreed to by almost all States,” the letter said.

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