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Finance Minister Nirmala Sitharaman. (PTI)
Finance Minister Nirmala Sitharaman. (PTI)

GST compensation stalemate buster

  • The Centre’s decision to borrow on behalf of states should help resolve a big dispute and let all administrations focus on covid challenges

A middle path seems to have been found to resolve the impasse between the Centre and states on the issue of goods and services tax (GST) compensation. On Thursday, the finance ministry said that it will borrow 1.1 trillion to meet the estimated shortfall in compensation cess and pass on this money to states as back-to-back loans. Who should borrow had become a matter of dispute between the two sides, with each pushing the other to do so. While the Centre had cited a lack of fiscal space to argue its case, states contended that the Centre simply had to compensate them under the GST Act, and so it had no funds available, it had to somehow arrange them and meet its commitment.

With the latest announcement, it appears the finance ministry has relented on its stance. Yet, the fiscal concern that was keeping it from raising funds also seems to have been addressed. The money, the Centre has said, would show as capital receipts of state governments, and hence would reflect in their respective fiscal deficits, not its own. Therefore, it would not worsen already-overstretched central finances. The repayment of the loans given to states would be done by adjusting future cess receipts due to them.

For the states too, the arrangement should work out favourably, as loans taken by the Centre are cheaper. To be sure, some issues still seem uncertain, such as who bears the interest burden, but the broad contours of the arrangement could end the dispute. This should hopefully restore some amity in Centre-state relations and allow all administrations to put the distraction behind them and get on with the task of tackling our covid crisis.

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