Centre reveals GST borrowing plan as states prep to move SC

The central government on Thursday said it will borrow under a special Reserve Bank of India (RBI) window and lend the money to states that opt for debt to bridge their revenue gap this fiscal arising from the indirect tax reform three years ago.

The borrowings will show as debt in the books of states and the centre’s fiscal deficit will be unaffected. So far, 21 states and two Union territories—Delhi and Jammu and Kashmir—have opted for this option to bridge their GST revenue shortfall this year.

An official statement issued by the finance ministry said the estimated shortfall of ₹1.1 trillion, assuming all states opt for borrowing, will be borrowed by central government in tranches and passed on to states “as a back-to-back loan in lieu of GST Compensation cess releases.”

A government official explained that this loan to states will get reflected as debt in the states’ financial statements, and that the Centre was only a facilitator to ensure all states get funds at the same rate.

However, nine states governed by non-National Democratic Alliance parties—including Punjab, Chhattisgarh, Kerala, West Bengal, Rajasthan and Puducherry—have oppose the proposal. They want the money to be given to them as GST compensation, not debt, and may push ahead with plans to move the Supreme Court.

“Some of the states are likely to approach SC against discriminatory and illegal action of Centre regarding GST Compensation. Kerala CM to chair a meeting of law, tax and finance departments and advocate general to take final decision on Kerala’s stance tomorrow afternoon,” Kerala finance minister Thomas Isaac tweeted earlier in the day.

One of the most vocal leaders on the issue, Isaac had indicated in an interview earlier this month that if the Centre gets its preferred borrowing options cleared by a vote and refuses to set up a dispute resolution mechanism, Kerala will move the Supreme Court.

The development comes at a time states have seen a sharp fall in tax receipts because of the outbreak of coronavirus pandemic.

“There was a suggestion from Punjab given at the GST Council meeting that the NDA government should form a Group of Ministers (GoM) that would speak to all stakeholders and submit its report in 48 hours. This move could have led to end this divide between the Union government and states but the Union government did not take any step. We want to know what is the plan of the Union government to reach a consensus,” a central leader of the Congress party said on condition of anonymity.

Besides Kerala, Congress-ruled states too are considering the legal option. According to people aware of developments, the dissenting states could pursue a common legal strategy, just as some states jointly challenged the National Eligibility cum Entrance Test (NEET) in Supreme Court.

“The question is, whatever is happening, is it constitutionally correct? And if it is not correct, then you have the option of approaching the court. Of course, it is a long haul and it is a strain on us because states do not have money. But, if it is the federal structure of the country at stake, then why should we not wait and consider all available channels to resolve it,” a Congress leader and GST Council member said on condition of anonymity.

If the dissenters decide on a legal solution, it would be the biggest divide yet in the GST Council where decisions are taken by consensus despite political differences.

gireesh.p@livemint.com