NEW DELHI: After joining hands with the states at the GST Council to extend the applicability of compensation cess on cars, coal and soft drinks beyond June 2022, the Centre on Monday closed the room for further negotiation, arguing that the modalities of borrowing funds can’t be finalised by the panel comprising Union and state finance ministers.
The latest move can further strain relations between the Centre and opposition-governed states. The change in stance came after finance minister Nirmala Sitharaman said at a press conference the Council agreed to meet again on October 12 to resolve the borrowing issue with the states. The issue has strained ties between the opposition states and the Centre as revenues have dried up due to the impact of lockdown. The latest development came after the finance ministry conceded some ground in helping states raise more funds to bridge the “revenue loss”.

While the government had assured to compensate states in case GST collections did not grow 14% annually, the compensation requirement has shot up to an estimated Rs 3 lakh crore this year due to Covid-19.

With a projected deficit of Rs 2.3 lakh crore, the Centre has come up with two options, involving market borrowings, to bridge the gap with repayment funded through the compensation cess. On Monday, as part of the first option, the Centre tweaked the formula in a way that the deficit due to GST implementation was pegged at Rs 1.1 lakh crore instead of Rs 97,000 crore estimated earlier.
The Centre has offered to help states access this money via a special RBI window to ensure competitive rates and also help them use the compensation cess to repay the interest and principal — an offer that has been accepted by 20 states. The other option is for states to borrow Rs 2.3 lakh crore directly from the market, which means at a higher cost.

Ten states and UTs including Kerala, West Bengal, Punjab, Chattisgarh, Delhi and Tamil Nadu have refused to accept the two options on the table and protested at Monday’s meeting. They want the Centre to borrow funds and allocate it to states.
Sitharaman, who heads the GST Council, suggested that states will need to make a distinction between Covid-related impact and those related to implementation issues as the law has not factored in the possibility a crisis like the Coronavirus pandemic. “Nobody will be denied compensation, arising out of implementing of GST and Covid impact. Borrowing has to be done. Decision is how much you want to borrow,” she told reporters after the marathon GST Council meeting, adding states will not have to bear the burden as the compensation cess will be used to clear the dues.

While she said further discussion on the issue will take place on October 12, Union government sources argued that the ball was not in the states’ court as borrowing was not a matter to be decided by the GST Council. “States have to give their preference to the expenditure department as it is an issue under Article 293 of the Constitution. The choice has to be exercised by states,” said a source, adding that the issue of voting in the GST Council meeting does not arise. The Council has jurisdiction to extend the levy of cess and it exercised its authority on Monday, an official explained.
Watch GST meet: States to get Rs 20,000 crore compensation cess