The 42nd Meeting of The GST Council Deferred To October 5 ! Will the Central Government Compensate For The Loss Of Revenue Due To COVID-19 & Lockdown?

Experts and sources have indicated that the 42nd meeting of the GST Council, originally scheduled for September 19, may now take place on October 5 due to a stalemate between state governments and the central government over GST compensation.

The government sources told reporters: The meeting has postponed because the central government believes that the opposition party will raise the issue of delaying the compensation payout to the states in the forthcoming monsoon session that will commence on September 14.

The sources appended: By the end of this month (September), the centre will have responses from all union territories and states to the two options recommended by the Goods and Services Tax Council. The government can be released some funds to states as the goods and services compensation already collected. Suggested that the center wanted to assess the opposition’s reaction in the parliament before going to the GST council to take further discussion.

The sources pointed that out of the 31 states and union territories, approximately 19 have replied to the center on their viewpoints about the options extending by the center to deal with the goods and services tax compensation shortfall. However, others have not yet responded.

The states in favor of the first option are Gujarat, Karnataka, Bihar, Madhya Pradesh, Assam, Tripura, and Goa. Those states in favor of the second option are Sikkim and Manipur.

States that disapprove of these two options are Rajasthan, Chhattisgarh, Tamil Nadu, Delhi, Punjab, Puducherry, Jharkhand, Telangana, Kerala, and West Bengal.

At the 41st GST Council meeting which was held on August 27, the center proposed two loan programs for states to solve the GST shortage. The first option offered that states can borrow 97,000 crore rupees, with 0.5% FRBM relaxation, while the second option proposed to borrow 23.5 crore rupees to cover all the contingency fund deficits.
At the same time, the message from the center makes it very clear that whether it is due to the implementation of GST or the COVID pandemic, the center remains committed to paying the entire compensation deficit to states.

Regarding the ongoing GST issues, government officials clarified that the GST council is not intending to increase the GST rates and has not yet made any decision on the price cut proposal.

The sources said, however, the center’s borrowing will put pressure on yields and increase interest rates. According to the first option, when the cess kitty has the necessary funds, it will provide more than 970 billion rupees as the protected income. Officials said that the Goods and Services Tax Council is likely to expand the transaction window to repay loans, adding that if the states agree to the first option, the center will open the 0.5% relaxation under the FRBM window.

They believe that up to now (6 months of this fiscal year), no state has been able to deplete the full 3% lending window, and all states have stopped investing in Treasury bills.

The government stated in the loan option statement circulated to all states that it promised to pay compensation. The finance minister has never stated that the government will not compensate for the loss of revenue due to COVID-19.

The Union government is committed to compensating all states for a shortage of goods and services tax (GST) of Rs 23.5 crore in 2020-21, regardless of whether the decline in revenue is due to GST implementation issues or the coronavirus disease. Two finance ministry officials said (Covid-19) a pandemic is an act of God.

The sources said that due to the shortage of goods and services tax collection, the full compensation will be honored and paid. The center conveyed that if the states choose to borrow 970 billion rupees with another option together, this does not mean that they will have to forego the remaining compensation.

Calculating the revenue shortfall based on the implementation of the goods and services tax is just a mechanism to evaluate how much the borrowing should cover and how much it can be deferred. When the private sector strives to resist its shortage, borrowing to cover the entire shortage may seriously hurt them. The compensation will be paid to the states after the above-mentioned loans are fully paid off.

When the person familiar with the matter explained the reason behind the fact that the center could not borrow to make up for the shortage of goods and services tax compensation, then person familiar with the fact said that according to the goods and services tax law, the compensation cess is a tax owned by the states. The sources explained that according to Article 292 of the Constitution of India, the center can borrow on the security of its resources (that is, India’s consolidated fund) and taxes. The center cannot borrow on the security of tax that it does not own.

When listing the benefits of government borrowings, the sources from the Ministry of Finance stated: This will ensure that even after the transition period is over, some resources will be provided in the form of compensation, which will enable future generations to maintain a healthy level of public expenditure for five years. After the transition period, states that have fallen off the resource cliff will not adopt a prudent fiscal strategy.

The Indian government has increased the borrowing limit from 3% to 5% of GSDP. So far, the states have only borrowed 1.25% of the GSDP on average. Only a few states have achieved more than 2% of GSDP.

The main reason is: States can obtain sufficient borrowing headroom according to their requirements and needs. In any case, they will receive the entire compensation shortfall, and so it is a win-win-win-win situation for the center, all states, and economies.

If the center borrows, it will have a greater impact on the market and push up the G-Sec rate, which becomes the benchmark rate for other borrowings (including state government borrowings). Any borrowing by the central government will crowd out lending by the private sector and make borrowing costs high for entrepreneurs.

Therefore, the determining factor will be whose borrowing that has the least impact on market interest rates. There is no doubt that since the central government securities’ rate works as one of the benchmarks of market interest rates, any additional borrowing by the central government will have a greater impact on market interest rates than the states. If the benchmark rate increases by the centre due to an increase in borrowers, the states will also be affected because this will increase their borrowing costs, the sources explained.

Therefore, under the current circumstances, due to the inability to obtain compensation, it may be a safer alternative option for all states to raise more resources to fill the resource gap. Since the indemnity or repayment will be derived from compensation cess, there is no reason why the rates will be different from each state. The debt window can be packaged in a manner that is completely state-independent altogether.