States will not have to pay either principal or interest if they choose to borrow just Rs 97,000 crore to cover the deficit in goods and services tax (GST) offset arising from GST implementation problems, but they will have to bear significant interest costs if choosing to borrow the entire deficit of Rs 2.35 lakh crore, which includes revenue losses stemming from the Covid-19 pandemic, the Union Finance Ministry said in a statement released on Saturday.
In the case of option 1, both the interest and the principal will come from the compensation rate charged to luxury products and sinful goods, and in option 2, only the principal will come from this, officials from the Ministry of Finance said. Treasury under condition of anonymity.
They added that the tax on such products will continue beyond the current deadline of June 30, 2022. The offset tax was originally imposed only for a five-year period to cover shortfalls in guaranteed payments to growing states. 14% in revenue. As the proposed debt options will be served by the compensation forfeiture fund, the lien will continue for longer, officials said.
The government has tried to distinguish between the deficit that arises from the implementation of the GST – according to the letter of the law, it is responsible for paying only this to the states – and that of an “act of God”, in this case, Covid- 19. It’s a nuance that doesn’t go unnoticed in the states, and those run by non-BJP parties are outraged by the idea.
At the 41st GST Council meeting on Thursday, the Center offered both options to states and promised to share the details on Saturday.
The Union Finance Ministry said in its statement on Saturday: “The two loan options to meet the GST offset requirement for 2020-21 as a result of discussions at the 41st GST Council meeting held on 27 August 2020 have been communicated to the States “. States have seven business days to communicate their preferences, he added.
“A meeting of the State Finance Secretaries with the Union Finance Secretary and the Secretary (Expenditures) is scheduled for September 1, 2020 to clarify issues, if any,” he said.
Explaining the details of the two options proposed to the states, the Center’s statement to the states said that in case they opt for the second option to borrow Rs 2.35 lakh crore, they will have to pay interest from their own resources.
One of the officials mentioned above said that the GST Act provides compensation to states for loss of revenue arising “from the implementation” of GST. “In essence, the compensation payable is projected revenue (at a compound growth rate of 14% from the 2015-16 base figure) minus actual revenue in each period,” he said, citing the Act.
“Therefore, the Rs 97,000 crore is fully covered by the GST offset tax under the law, and interest on loans above that amount will be borne by the states. In any case, the capital will eventually be paid out of the cessation fund ”, he added.
The GST law assures states a 14% increase in their annual income for five years starting July 1, 2017 and also guarantees that their income deficit, if any, would be compensated by the compensation rate imposed on the luxury and sin products such as liquor, cigarettes, sparkling water, automobiles, coal, and tobacco products.
An indirect tax expert said on condition of anonymity that the Center’s letter issued on Saturday could divide the council. “This could polarize the GST Council. It appears that states governed by the Bharatiya Janata Party (BJP) will go for the first option and states governed by the opposition may go for the second option, as they would like to borrow more to overcome the current crisis, ”he said.
West Bengal Finance Minister Amit Mitra will hold a press conference at 2pm on Sunday to explain why the center’s proposal on GST is totally unacceptable, said a Trinamool congressional leader who did not want to be named.
MS Mani, partner at consulting firm Deloitte India, said: “It will not be an easy choice for states with liquidity problems. The statement, however, makes it clear that neither the Center nor the states are willing to include more items in the scope of the cessation or raise their rates for at least one year due to the prevailing economic situation. But it does not address the broader problem of increasing GST collection at a time when overall tax revenues, both for the Center and for the states, are falling. “
“Unfortunately, businesses and consumers have no respite. The cessation of luxury items and items of sin will continue, but certain items, such as passenger cars and two-wheelers, are not luxury items or items of sin. It will have an adverse impact on business confidence, particularly in the automotive sector, ”he said.
.
