NEW DELHI: The states ruled by the Center and the Opposition are set for another showdown on Monday when the GST Council meets to discuss the constitutionally required goods and services tax (GST) offset for state governments for fiscal year 21 .
The central government is in a bind as around 10 states ruled by the Bharatiya Janata Party rejected the Finance Ministry’s proposal that states borrow to cover the GST revenue shortfall and instead demanded the creation of a dispute resolution mechanism.
Kerala, West Bengal, Punjab and Delhi want the Center to borrow the full amount of the GST revenue shortfall and compensate the states.
Kerala’s Finance Minister Thomas Isaac, in an interview earlier this month, said that if the Center pushes for the loan options to be approved by vote and refuses to establish a dispute resolution mechanism, his state will move to the Supreme Court.
Abhishek Jain, partner at EY India, said the Constitution does not specify any dispute resolution mechanism and the decision on the framework has been left to the GST Council. “The dispute resolution mechanism can be an arbitration process, possibly under a group of former Supreme Court justices. It could also be a group of ministers within the GST Council that have now been suggested by opposition states. The Center and the dissident states need to talk and find a middle ground, possibly agreeing to divide the borrowing requirement evenly between the center and the states, “Jain said.
The Center has drawn a distinction between what is paid to states as compensation due to the implementation of the indirect tax reform, implemented in 2017, and the loss of revenue due to the pandemic.
At the 41st meeting of the GST Council in August, the central government had given states two borrowing options, one in which they can borrow. ₹97,000 crore from the central bank through a special window that is attributable to the implementation of GST or to the increase in the total amount of the income deficit of ₹2.35 billion of the market. The two options were subsequently revised to ₹1.1 trillion and ₹1.8 billion respectively.
While Finance Minister Nirmala Sitharaman has tried to buy peace by ensuring that full compensation will be paid to the states, a final call on how compensation will be processed was postponed until the 43rd meeting of the GST Council.
“No one will be denied compensation for losses arising from the implementation of GST or due to the impact of covid,” Sitharaman had said.
The states’ GST revenue shortfall this year, either due to GST implementation or due to covid, will be fully covered, the minister assured at the last meeting earlier this month.
Rathin Roy, managing director of the Overseas Development Institute, said he does not see how the matter can be resolved at Monday’s meeting unless the Center offers to pay interest. “But if it does, it could also borrow on its own,” he added.
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