Out of the 22, barring one, all states have opted for borrowing only to the extent of their revenue shortfall arising from GST implementation. Mizoram, however, opted for borrowing the entire GST shortfall this year, including for revenue lost due to covid-19, said a government official, seeking anonymity. Last month, the Council had considered the two options at a meeting.

Some more states were expected to share their borrowing options in a day or two, but Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, and West Bengal have not responded to the GST Council’s borrowing proposals yet, said the official.

Kerala, Punjab and Delhi have been very vocal about their disapproval to raising debt by themselves, and demanded that the Centre ought to borrow and compensate them for GST revenue losses. However, the demand was turned down by the central government.

The official said even with full quorum, the Council needs 20 states to pass a resolution if voting is required. Voting is a rare feature in the Council, which was resorted to only once so far to decide on the taxation of lotteries when north eastern and southern states had expressed different views. The precedence has been to take decisions by consensus, but the strained finances of the central and state governments have threatened this tradition. The Centre holds one-third weighted votes in the Council, while the rest remain with states. The Council can take decisions with 75% of weighted votes.

The dissenting states could face financial stress if they do not accept the proposal to let them borrow as it is the only option on the table at present.

“It is clear from the present situation, that if the other states do not submit their options before the GST Council meet on 5 October, then they will have to wait till June 2022 to get their compensation dues subject to the condition that the GST Council extends the cess collection period beyond 2022,” said the official.

The vertical split in GST Council comes at a time when several states led by opposition parties have raised the demand for a robust financial package to aid them in dealing with the fallout of the covid-19 pandemic. The issue is also significant as it comes in the middle of a Parliament session where several parties have demanded a discussion on the GST compensation issue.

The GST Council is considered symbolic of federal polity where states cutting across political parties come together to brainstorm over various contours of the taxation regime. With a section of political parties taking a different approach on the issue, the fault lines could deepen further amidst their concerns that the issue puts them in a tighter fiscal position in states.

Senior opposition leaders feel that the move runs the risk of those with majority stakes overtaking concerns of states which disagree with a larger view. Speaking to reporters last week, Punjab chief minister Manpreet Singh Badal had said that “despite including a provision in the Indian Constitution regarding compensating states in case of GST revenue shortfall, the NDA government had deliberately ignored the federal fabric of the Constitution.”

The GST compensation issue had brought opposition parties together, with Congress president Sonia Gandhi rallying chief ministers of seven opposition-ruled states on the issue last month. This included West Bengal chief minister and Trinamool Congress leader Mamata Banerjee, Maharashtra chief minister and Shiv Sena chief Uddhav Thackeray, and Jharkhand chief minister and chief of the Jharkhand Mukti Morcha Hemant Soren, apart from four chief ministers of Congress-ruled states.

“With many states opting for the first borrowing option, it seems that businesses must brace themselves now for an extension of the period of the compensation cess and plan their cost and pricing strategies accordingly,“ said M.S. Mani, tax partner at Deloitte India.

Most states opting for the first borrowing option, which is limited to the GST revenue losses attributable to the 2017 indirect tax reform, underscores its merits over the second option which covers the revenue impact of the pandemic too.

Under the first option, both the interest as well as the principal borrowed will be covered by receipts from GST cess, which will be extended 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 0.5% tranche of the extra 2 percentage point borrowing that was allowed to states earlier, without any rider.

Experts said that with as many as 22 state members of the Council agreeing for the borrowing option, the immediate pressure on increasing the GST cess rate or widening its coverage to raise funds amid a consumption slump has eased.