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The deep divisions within the goods and services tax (GST) Council over bridging the shortfall in GST receipts of states look set to be addressed with the most vocal among dissenting states dropping their opposition and signing up for a new stream of debt that will help them deal with their current fiscal woes.

The attractive interest rate at which the Centre is borrowing on behalf of the states to meet their GST revenue shortfall, the efficiency in transferring funds on a weekly basis, and the urgent need for funds prompted even non-Bharaitya Janata Party (BJP)-ruled states, such as Rajasthan, Telangana, Delhi, Kerala, West Bengal and Punjab, to drop their opposition, and accept the Centre’s proposed solution, said two people with direct knowledge of the negotiations between the Centre and the states. The development signifies that economic rationale is finally overriding political differences in the federal indirect tax body, comprising central and state finance ministers.

“The central government went an extra mile to borrow on behalf of the states. The weighted average of the cost of funds borrowed is 4.74%, which is very attractive compared to what it would have been if states had borrowed directly," said a central government official, who spoke on the condition of anonymity.

The Centre is committed to transferring funds on a regular basis to states. Jharkhand and Chhattisgarh, the only two states to sign up for the scheme, will hopefully join soon, he added. So far, 26 states and three Union territories with legislatures have opted for the scheme.

The change in stand of the Opposition-ruled states over the long-drawn stalemate took place after the Centre in mid-October decided to borrow more than 1 trillion to meet the short fall, said senior political leaders, also requesting anonymity.

The Centre conceded some ground and tweaked one of the two borrowing options to meet the revenue loss of states because of GST implementation of 1.1 trillion this fiscal with debt, and agreed to borrow on behalf of states and pass on the same instead of states directly hitting the market to raise debt. A second option has not found any takers as the borrowing terms were not attractive. A senior finance minister from an Opposition-ruled state said the objection of dissenting states to the borrowing proposal was because “a majoritarian decision" was being imposed on them. “We have been saying since the beginning that the Centre should borrow (and not the states) and it eventually decided to borrow over 1 trillion, which no state was opposed to."

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