Out of the 22 but one, all the states have chosen to borrow only to the extent of their revenue shortfall from the implementation of the GST. However, Mizoram chose to borrow the entire shortfall from GST this year, including lost revenue due to COVID-19, said a government official, seeking anonymity. Last month, the Council had considered both options at a meeting.
A few more states were expected to share their loan options within a day or two, but Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, and West Bengal have yet to respond to loan proposals from the GST Council. said the officer.
Kerala, Punjab and Delhi have openly voiced their disapproval of raising debt on their own, demanding that the Center should borrow and make up for lost GST revenue. However, the demand was rejected by the central government.
The official said that even with a full quorum, the Council needs 20 states to pass a resolution if a vote is required. Voting is a rare feature in the council, which has been used only once so far to decide on lottery taxes when the northeastern and southern states had expressed different views. The precedence has been to make decisions by consensus, but the strained finances of the central and state governments have threatened this tradition. The Center has a third of the weighted votes in the Council, while the rest remain in the states. The Council can make decisions with 75% of the weighted votes.
The dissident states could face financial strains if they do not accept the proposal to allow them to borrow, as it is the only option on the table at the moment.
“From the current situation it is clear that if the other states do not present their options before the GST Council meets on October 5, then they will have to wait until June 2022 to obtain their compensation quotas subject to the condition of that the GST Council extends the tax collection period beyond 2022, ”the official said.
The vertical split in the GST Council comes at a time when several states led by opposition parties have raised the demand for a robust financial package to help them deal with the consequences of the covid-19 pandemic. The problem is also significant, as it arises in the middle of a session of Parliament where various parties have demanded a discussion on the issue of GST compensation.
The GST Council is considered a symbol of federal politics where states that cross political parties come together to brainstorm various contours of the tax regime. With a section of political parties taking a different approach on the issue, the dividing lines could deepen even further amid their concerns that the issue puts them in a tighter fiscal position in the states.
Top opposition leaders feel the move runs the risk that those with majority interests will outweigh the concerns of states that disagree with a larger vision. Speaking to reporters last week, Punjab Prime Minister Manpreet Singh Badal said that “despite including a provision in the Indian Constitution on compensation of states in case of shortfall in GST revenue, the government of the NDA had deliberately ignored the federal fabric of the Constitution. “
The GST compensation issue had united opposition parties, and Congress President Sonia Gandhi brought together top ministers from seven opposition-ruled states on the issue last month. This included the Prime Minister of West Bengal and leader of the Trinamool Congress, Mamata Banerjee, the Prime Minister of Maharashtra and the head of Shiv Sena, Uddhav Thackeray, and the Prime Minister of Jharkhand and head of Jharkhand Mukti Morcha Hemant Soren, in addition to four chief ministers of states governed by Congress.
“With many states opting for the first loan option, it appears that companies should now prepare for an extension of the compensation period and plan their cost and pricing strategies accordingly,” said MS Mani, Deloitte India tax partner.
Most states that opt for the first borrowing option, which is limited to GST revenue losses attributable to the 2017 indirect tax reform, underscore their merits over the second option, which also covers the impact of the pandemic. in income.
In the first option, both the interest and the principal loaned will be covered by the receipts of the GST assignment, which will extend beyond June 2022. In the second option, the interest will be payable by the states. Also, opting for the first option will allow states to borrow the final tranche of 0.5% of the 2 additional percentage points that states were previously allowed, without any attachments.
Experts said that with up to 22 council member states agreeing to the borrowing option, immediate pressure to increase the GST’s cessation rate or expand its coverage to raise funds amid a drop in consumption has eased.
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