GST Council meet on compensation mechanism inconclusive for second time

Kerala Finance Minister Thomas Isaac said, Sitharaman's announcement that she would permit 21 states to borrow in line with Option 1 was illegal

The GST Council meeting remained inconclusive for the second time on Monday after the Centre offered two options to states for compensating them for the loss of revenue under the indirect tax regime as there was no consensus on the issue. Finance Minister Nirmala Sitharaman appealed to the Council and the states to quickly decide on the states which want to borrow.
 

"I appealed that we need to quickly give answers to states that want to borrow," the finance minister, who chaired the meeting, told reporters.
 

Majority of states -- 21 of 30 -- had opted for the RBI window of Rs 1.1 trillion.
 

"On the one hand, they (21 states) were repeatedly asking for fast disbursal of money due to the festive season and the impact of Coronavirus, on the other you had other states insisting on a consensus on the issue," the finance minister said.
 

She said that while she respected unanimity, can the Council stop other states from doing what they want to do. "I put this before the Council. If states want to borrow to make up for the compensation shortfall, can the Council stop a member from doing that? On that point, we were not able to arrive at a consensus," she said.
 

She emphasised that there was no dispute, but differences of opinion.
 

However, Kerala Finance Minister Thomas Isaac, after the meeting, said, “Union FM’s announcement that she is going to permit 21 states to borrow according to Option 1 is illegal.” Isaac said that option 1 involved deferment of compensation payment beyond five years for which a Council decision was necessary in line with AG’s opinion. No such decision has been made in the Council, he said.
 

Isaac further said that it was unfortunate that the Union finance minister did not propose a decision in the Council or even make a statement what she was going to do, but chose to make the announcement in the press conference.
 

The finance minister explained to the states that the Centre cannot borrow at this point of time. It has already released its calendar and changes will jack up the yields of government bonds which are benchmarks for the borrowing by the states and even the private sector.
 

"It is going to affect everyone’s borrowing. At a time when India is looking at more money to borrow and invest, can we afford that?" Sitharaman wondered.
 

However, if the states are to borrow, it is not going to be that severe. It will also not be chaotic as every state need not rush to the market, she said.
 

"We shall arrange and facilitate. It won't be that some states will end up paying high interest rates and others obtain at a reasonable rate. We will try to ensure that all states end up paying a reasonable rate," she said.
 

States also asked the Centre as to why additional borrowing could not be undertaken beyond Rs 1.10 trillion. They also asked the Centre about Attorney General K K Venugopal's opinion on borrowing.
 

M S Mani, partner, Deloitte India said, “Businesses would be keenly waiting to know the period and the terms on which the compensation cess would be extended as that would have a significant bearing on their business plans.”