Centre blinks on GST

States should be taken on board while working out the modalities on the quantum and distribution of borrowings

Though the Centre has finally blinked to break the deadlock over compensating the States for the loss of their GST revenues, it needs to do a lot more to bridge the trust deficit and ensure that the spirit of cooperative federalism is upheld. After stiff resistance from several States, including Telangana, the Union government has now agreed to borrow up to Rs 1.1 lakh crore on behalf of the States to meet the shortfall in collections. The intervention comes in the wake of the GST Council’s failure to arrive at a consensus over the Centre’s proposal that the States should borrow themselves against future GST collections to bridge the revenue gap. While this is certainly a welcome development, the Centre should now focus on taking the States on board while working out the modalities on the quantum of borrowings and their distribution among the States. When the new tax regime was rolled out in July 2017, the States were promised incremental revenue of 14% over their last tax receipts in the first five years till 2022. This means the States should be compensated for any revenue shortfall. The dispute is over Rs 3 lakh crore that the Centre owes to States this year. It must be pointed out that the States were already struggling to meet the GST targets in view of the economic slowdown since August last year. Things went from bad to worse with the outbreak of the pandemic and the consequent lockdown.

It would be a terrible blow to the spirit of federalism if any State is denied compensation for losses arising out of implementation of the GST or due to Covid-19 impact. As per the rough estimates, the compensation to the States in 2020-21 is likely to be around Rs 3 lakh crore, whereas the collection would be only around Rs 70,000 crore. Of this shortfall, the Centre has estimated the shortfall due to “implementation of the GST” at Rs 97,000 crore and the balance as being the result of the pandemic impact. In August, the Centre gave two options to the States — to borrow Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from the market. This was a clear betrayal of the agreement and amounted to undermining the federal spirit. It must be remembered that the States had already ceded their taxing powers to the GST Council and the Centre. On top of it, they were being forced to pledge potential future revenues to meet current shortfalls, which were supposed to be covered by the Centre. With the onset of the festive season, the States need to make the most of the borrowings to reboot their economy.

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