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The tussle between the Centre and states over the goods and services tax (GST) compensation is “the biggest tension point in the federal system", Kerala finance minister Thomas Isaac said. The states are demanding full compensation by the Centre, but the Union government is asking the states to bridge the gap through market borrowing. The issue has led to face-offs between state governments and the Centre at the GST Council meetings and is likely to become a flashpoint in the monsoon session of Parliament set be begin in mid-September.

“This is going to be a big fight. I think it is the biggest cause of tension in the federal system because there are states who will never agree to any cut in compensation and we will fight to the end," Isaac, who is leading dissenters against the Centre in the GST Council, said in an interview.

On Monday, five finance ministers of non-Bharatiya Janata Party (BJP) ruled states, including Isaac, had held a virtual meeting and rejected the Centre’s proposals to bridge the revenue gap through market borrowing by the states. Isaac said that, if needed, he will seek legal recourse to get the “entire compensation".

“One point on which I will never compromise is that the entire compensation must be given. We are now saying the Centre should borrow, but we can think of other options. However, full compensation must be given and the cost of that compensation must be met from the cess fund. That is something I will not compromise with. If necessary, I will also move the court."

The Kerala finance minister claimed that more states will join the chorus demanding full compensation. “All states who spoke at the (GST) Council, other than Goa and Assam, expected full compensation and that, too, borrowed and provided by the central government. Of course, BJP-ruled states put it mildly, but other states put it sharply," he added.

In a letter to the states last week, the Union government had reneged on compensating the states for GST shortfalls, claiming covid-19 being an ‘Act of God’ has squeezed options. Isaac called the ‘Act of God’ theory silly. “Because there is an ‘Act of God’ at any point in this vast country, natural ones like drought or man-made ones such as demonetization. Are you going to now do a factor-analysis of the fall—oh that state has an ‘Act of God’, therefore, they won’t get the full compensation?"

Isaac also protested against the attorney general saying that the government has no legal obligation to pay full GST compensation to states. The government is morally bound to pay the full compensation, if not legally, Isaac said. If it comes to a point where the states “cannot legally force them to do that, then the (GST) Council should explore how this money can be raised," he added.

The Centre is supposed to provide compensation to the states for loss of revenue arising from the implementation of the GST, along with a 14% annual rise, until 2022.

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