The Council, chaired by Sitharaman and comprising state finance ministers, for the third time in a row discussed the issue of funding the shortfall of Goods and Services Tax (GST) revenue of states. While some opposition-ruled states demanded that a Group of Ministers be set up to arrive at a decision on the mechanism for funding compensation shortfall, the BJP-ruled states, which have already opted for the borrowing option given by the Centre, are of the view that they should be given a go ahead so that they can get money quickly.
By the end of today's meeting, 12 states had accepted the centre's payment proposal - to borrow from the markets on their own account - but nine others stood their ground and insisted that the centre, which is bound to provide GST compensation, do the borrowing.
Overall 21 states - mostly those ruled by the BJP or those that supported it on various issues - have agreed to borrow. Sitharaman has asked for time to consider the demands of the nine states who refused to do so after today's meeting.
GST (Goods and Services Tax) compensation has emerged as a sore point with state and union territory governments this year, particularly with the adverse economic impact of the Covid pandemic and lockdown.
Punjab Finance Minister Manpreet Badal said it would not be right for the Centre to impose its will, asserting that the shortfall should only be made good by the Centre replenishing the Compensation Fund instead of asking states to borrow.
The Centre repeatedly emphasised the point that 21 states and Union Territories have already accepted the first option and that as per constitutional provisions, the GST Council does not have the jurisdiction to approve the borrowing plan of states.
The two borrowing options given by the Centre to the states at an earlier GST meeting included: calculating GST related shortfall in revenue at Rs 1.10 lakh crore, which states should borrow from the RBI under a special dispensation. This borrowing will not be counted from any of the states’ existing borrowings and its entire interest and principal would be settled through compensation cess, including the levy in the extended period.
The second option gives the states’ plan to borrow the entire expected shortfall of Rs 2,35,000 crore this year and this borrowing will only be paid back to states during the extended period of GST compensation cess levy.
As states are hard-pressed for finances to meet their expenditure, some like Bihar want the issue of pending compensation dues worth over Rs 2 lakh crore to be settled at the earliest.
The centre is finding it difficult to pay states compensation - due if a state's revenue grows slower than 14 per cent - because states have not earned much this year due to months of lockdown necessitated by the COVID-19 crisis.
The total compensation due to states was around ₹ 97,000 crore but has been raised to around ₹ 1.1 lakh crore by demand of various states, news agency PTI reported. Including Covid-related financial relief, this rises to ₹ 2.35 lakh crore.
Earlier this year the Finance Minister, after a meeting of the GST Council, said an "act of God, an unforeseen factor", had affected GST collections, and said a cash-strapped central government would struggle to pay states fully. Instead, she suggested, states could borrow from the markets.