With the Center agreeing to borrow ₹ 1.1 lakh crore from a special window of the Reserve Bank of India and re-lend it to states, some of the seven states that have not yet accepted the plan are now able to sign it, the Government officials with direct knowledge of the matter said on Friday.
The officials added that the Goods and Services Tax (GST) Council could, based on revenue streams over the next few months, review the amount of loans.
The only contentious issue left is the remaining gap of ₹ 1.25 lakh in compensation. As GST revenues rise, this could end up being just ₹ 70,000 crore in 2020-21 (in addition to ₹ 1.1 lakh crore), said two officials who belong to different dissident states and one who works for the Ministry of Finance. of the Union, they said on condition of anonymity.
“The Center’s decision to borrow from the market and pass the same to the states as an attached loan is in the spirit of cooperative federalism. That addressed our immediate concern. Later, the GST Council can always review the financial situation and take the necessary action on a similar principle, ”added one of the state government officials.
Also read: How the Center borrowing Rs 1.1 lakh crore will affect the states, explains Nirmala Sitharaman in a letter
The Center’s decision on Thursday followed by the letter from GST Council President and Union Finance Minister Nirmala Sitharaman to the states softened the position of seven dissident states on the issue of compensation termination, the second official said. of the state government.
The seven breakaway states are Chhattisgarh, Jharkhand, Kerala, Punjab, Rajasthan, Telangana, and West Bengal. Puducherry had previously indicated his preference for the borrowing option, but the Expenditure Department has not yet received a formal communication, said the third official, who works at the Union Finance Ministry.
Sitharaman wrote to states on Thursday: “I am also sensitive to the fact that states must be protected from the adverse consequences of increased indebtedness in the form of passive interest rates and added debt. Under Option-I, the Government of the Union will organize the loan in such a way that the cost is equal to or close to the interest rate of the Government of the Union. “
On August 27, the Center gave states the option to borrow ₹ 97,000 crore (the shortfall resulting from GST implementation problems) without having to pay principal or interest or the full compensation gap of ₹ 2.35 lakh crore (including that derived from the Covid-19 pandemic). ) projected for this fiscal year. The amount of ₹ 97,000 crore was subsequently raised to ₹ 1.1 lakh crore on October 5. Some states objected and insisted that the Center would have to make the loan.
While 10 states originally opposed the plan, this number dropped to seven on Wednesday. The GST Council is a federal body, chaired by the Union finance minister, and whose members include the state finance ministers. This is the body that decides tax rates and other GST-related issues. Until the recent controversy, all their decisions had been made on the basis of consensus.
The finance minister’s letter said that the central government faces “very serious” budget restrictions. “Long-term macroeconomic stability is the responsibility of the Center; but it is also in the interest of the states that are partners in our system of cooperative federalism. The good faith opinion of the central government on this macroeconomic issue is that borrowing from the Center’s books will not be optimal in the national interest, ”Sitharaman wrote.
Commenting on the Single Window Loan Facility announced yesterday, he said: “We have now resolved some key aspects of the Special Window. Based on the suggestions of many states, it has now been decided that the central government will initially receive the amount and then consecutively pass it on to the states as a loan. This will allow easy coordination and simplicity in borrowing, as well as ensuring a favorable interest rate ”.
He assured state governments that all compensation arrears “eventually” will be paid to states. He thanked the states for their “collaborative” approach that resulted in a “practical and constructive solution” to this compensation problem.
The GST Board, on October 5, unanimously extended the compensation rate beyond June 2022 until the states are compensated for their assured revenue shortfall. At the time the new tax regime was introduced in July 2017, the GST law assured states a 14% increase in their annual revenue for five years (through June 30, 2022); Any shortfall in income should be offset by offsetting sin and luxury goods such as liquor, cigarettes, sparkling water, automobiles, coal, and other tobacco products. The termination would have ceased to exist after June 30, 2022, without the Council’s decision to extend it.
Kerala Finance Minister Thomas Isaac welcomed the Center’s decision on Thursday. But there is a problem that has not yet been resolved: how much of the compensation will be deferred until 2023? Negotiate this point and reach a consensus, ”he said in a tweet.
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