GST row: Compensate states that picked a borrowing option, says Sushil Modi

Amid discord over goods and services tax (GST) compensation, Bihar deputy chief minister Sushil Modi said disbursal should begin for states that have opted for either of the two borrowing options proposed by the Centre.

He also proposed that consultation with dissenting states could be carried out separately. 

This comes a day after Kerala finance minister Thomas Isaac pitched for voting in the GST Council if the Centre sticks to the two options it has proposed.

With at least seven Bhartiya Janata Party (BJP)-ruled states having officially opted for either of the two compensation options proposed by the Centre, Modi told Business Standard that holding further consultations will further delay the compensation for states that have already decided.

Dissenting or opposition-ruled states are likely to pitch for voting or operationalising dispute in the upcoming GST Council meeting on September 19. However, BJP-ruled states will press for release of money to them in order to tide over the current fiscal stress.

While Bihar, Gujarat, Karnataka, Tripura and Madhya Pradesh opted for the Reserve Bank of India (RBI) window, Manipur and Sikkim went for market borrowing. Tuesday was the official deadline for submitting options. However, finance ministry sources said the deadline is not cast in stone and if states’ responses come even a couple of days later, they will be considered.

“Dispute resolution will take another 3-4 months. Similarly, voting will also not serve much purpose as it will mean more deliberations, and will rather derail the process. Why should other states suffer because of a few dissenting ones. States need money now to pay salaries and do routine spending,” said Modi. “The Centre can sit with the dissenting states and hold further talks if it wants. The borrowing process for states that have already opted for either option one or two should not get delayed further,” he added.

Isaac, who is recovering from Covid, on Tuesday called the non-payment of full GST compensation an ‘act of fraud’ by the Centre. He tweeted, “Calamities are often acts of nature, demonetisation was an act of man and Covid an act of God, maybe. But non-payment of full GST compensation is an act of fraud by GoI. Shameful is the manner in which arguments are being shifted with the single objective of non-payment of full compensation.”

On the Centre’s argument that full compensation will be paid even in case of the first option (but will be deferred), Isaac said, “Deferring half the compensation for better times, ipso facto, is deferring public expenditures to better times. It is the surest way of deferring future good days.”

The finance ministry has estimated that there would be a compensation requirement of Rs 3 trillion for states and the compensation cess would be around Rs 65,000 crore for the current financial year, leaving a gap of Rs 2.35 trillion. Of this gap, Rs 97,000 crore is on account of the GST structure and the remaining due to the lockdown to arrest the spread of Covid-19.

It offered two solutions to the state governments. The first is that states take a Rs 97,000-crore window, to be worked out with the RBI, or borrow Rs 2.35 trillion from the markets to be facilitated by the central bank. 

The amounts will be paid by the compensation cess which will be extended beyond June 30, 2022. However, states will have to bear the interest burden if they decide to borrow the entire Rs 2.35 trillion shortfall.

In case of the second option, proposed extension of cess will be used for paying only the principal amount and not the interest.

In case of voting, the Centre would need the support of 19 states. The National Democratic Alliance (NDA) is ruling in 16 states out of 29 with Jammu and Kashmir — a union territory – under the President’s rule. 

On the other hand, even if all the states combine, they do not have the power to take a decision, as 75 per cent votes are required to ratify the decision.

Under normal circumstances, when each of the states and the Centre vote on an issue, the Union government can block the decision of the majority on its own. But it will take as many as 12 states to do the same.