GST council needs to work out mid-way solution for settling revenue shortfall issue: Sushil Modi

The Centre has given two options to the states to borrow either from a special window facilitated by the RBI or from market and has also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022.

August 31, 2020 / 12:10 PM IST

The relation between the Centre and states is not that of 'giver and taker' and the GST Council will have to work out a mid way solution for making good the GST collection shortfall keeping in mind the central government too is bearing huge revenue loss due to COVID-19, Bihar Deputy Chief Minister Sushil Modi has said.

Non-BJP ruled states like Punjab, Kerala, Delhi and West Bengal are at loggerheads with the Centre over the financing of the Rs 2.35 lakh crore Goods and Services Tax (GST) shortfall in the current fiscal.

Of this, about Rs 97,000 crore is on account of GST implementation and rest Rs 1.38 lakh crore is the impact of COVID-19 on states' revenues.

The Centre has given two options to the states to borrow either from a special window facilitated by the RBI or from market and has also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022.

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Talking to PTI, Modi said both the central government and states are stakeholders in GST and instead of playing a 'blame game', states should also consider that apart from the pandemic, the Centre is also facing challenges on the defence side which needs higher spending.

"It is not that only states' revenues have been affected, central government's revenue too is constrained and a huge borrowing by the Centre would have macro-economic impact.

"The relation between the Centre and states is not that of 'giver and taker', we have to keep the spirit of cooperative federalism in mind and work out a mid way (solution)," said Modi, who also holds the finance portfolio in the coalition government of BJP, JD(U) and LJP in Bihar.

The Centre has circulated two options to the states. This include borrowing of Rs 97,000 crore shortfall, which will be repaid by extending the cess beyond 2022.

States would get the loan at an interest rate based on prevailing government securities (G-Sec) rate and the interest and the debt will not get reflected in their fiscal deficit and balance sheet.

Under the second option, states can borrow the entire Rs 2.35 lakh crore from market and hence the interest would be higher. While the states will have to bear the interest burden in full, for repayment of principal only Rs 97,000 crore would be repaid from the cess collection beginning 2022-23 fiscal.

Asked which option would be better for Bihar, Modi said prima facie the first option of borrowing Rs 97,000 crore looks attractive, but the state would study in detail and then make a final decision.

He said in this option while states can borrow the remaining Rs 1.38 lakh crore to meet their immediate needs, and the principal amount would be repaid later from cess collection.

Explaining the option further, Modi said the compensation cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the states.

During April-July of current fiscal, the total compensation requirement of states stand at Rs 1.50 lakh crore. Total GST collection during April-July was Rs 2,72,642 crore, which is 65 per cent of what was collected in same period last year.

The payment of GST compensation to states became an issue after revenues from the imposition of cess started dwindling since August 2019. The Centre had to dive into the excess cess amount collected during 2017-18 and 2018-19.

The Centre had released over Rs 1.65 lakh crore in 2019-20 as GST compensation. However, the amount of cess collected during  2019-20 was Rs 95,444 crore.

The balance Rs 69,556 crore was paid from the excess cess collected in 2017-18 and 2018-19.

The compensation payout amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18.

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