Home / News / India /  GST meeting sets stage for Centre-states confrontation

The Goods and Services Tax (GST) Council’s meeting on Monday is set to witness a face-off between the Union government and states ruled by parties outside the National Democratic Alliance (NDA) over the constitutionally mandated GST compensation to state governments for fiscal 2021.

The Centre is in a dilemma as around 10 non-NDA states have rejected the Union finance ministry’s proposal that the state governments should borrow to meet the shortfall in GST revenue and have demanded the setting up of a dispute settlement mechanism.

States such as Kerala, West Bengal, Punjab and Delhi want the central government to fully borrow the GST revenue shortfall amount and compensate them.

Kerala finance minister Thomas Isaac said in an interview earlier this month that if the central government presses to get the borrowing options cleared by vote and refuses to set up a dispute resolution mechanism, the Kerala government will move the Supreme Court.

Abhishek Jain, a partner at EY India, said the Constitution does not specify what sort of dispute resolution mechanism should be put in place and deciding the framework has been left to the GST Council.

“The dispute settlement mechanism can be an arbitration process, possibly under a group of former Supreme Court judges. It could also be a group of ministers within the GST Council which now the opposition states have suggested. The Centre and the dissenting state governments need to talk and find a mid-way, possibly agreeing to equally divide the borrowing requirement between the Centre and states," he added.

The central government has drawn a distinction between what is payable to the states as compensation due to the implementation of the indirect tax reform in 2017 and the revenue loss on account of the pandemic.

In the 41st meeting of the GST Council in August, the central government gave two borrowing options to states, one in which they can borrow 97,000 crore from the Reserve Bank of India (RBI) through a special window, which is attributable to GST implementation, or the entire amount of revenue shortfall of 2.35 trillion from the market.

The two options have subsequently been revised to 1.1 trillion and 1.8 trillion, respectively, as the Centre sees lesser shortfall in GST revenues with the economy already on the mend. GST receipts rose 3.8% to 95,480 crore in September for the first time this fiscal, signalling a recovery after months of turmoil due to the pandemic and offering a glint of hope to policymakers. The Reserve Bank of India has projected the economy to record positive growth in the March quarter.

While Union finance minister Nirmala Sitharaman has sought to buy peace with the dissenting states by assuring them that full compensation will be paid to states of their shortfall in tax receipts due to either the implementation of GST or the pandemic, a final call on the compensation mechanism was deferred to the next GST Council meeting.

“Nobody is going to be denied compensation for losses arising out of implementation of goods and services tax or due to covid impact," said the minister.

“States’ Goods and Services Tax revenue shortfall this year either due to GST implementation or due to covid will be met completely," the minister assured in the last meeting earlier this month.

Rathin Roy, managing director at Overseas Development Institute, said he does not foresee the issue to be resolved in Monday’s meeting unless the Centre offers to pick up the interest liability.

“But if it does that, it might as well borrow on its own account," he added.

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