Swords Drawn At GST Meet After Centre Despite Owing Money Tells States To Borrow From RBI

Consider this bizarre situation - A (Centre) owes money to B (States) on account of compensation for shortfall in GST collections, for the order of Rs 3 lakh crore. In the middle of COVID-19 firefight, A tells B : “I can only pay Rs 65,000 crore but I have a solution. You people go and borrow the remainder Rs 2.35 lakh crore from RBI and repay it after five years when I pay your dues. On my part, I will put in a word to RBI.”

A, who owes money to B , in the first place, also does a big 'favour' to B stating , “I would get you the loan at the best rates.”
This is intriguing ingenuity on the part of the Centre. Under the GST law, which came about after amending the Constitution and became effective from July, 2017, the Centre is bound to compensate the states on any shortfall in the assured level of revenue for five years. It was this assurance, provided in the law, that had prompted the states to come on board under a dispensation that subsumed 17 different taxes (mostly in the states' purview).
It was built into the system that the shortfall in the tax revenue had to be made up by levy of special cess on luxury goods or so-called 'sin goods' over and above the top bracket of 28 per cent. This had to end after five years in 2022 and the cess was not to continue thereafter.

But now, two things would happen, the states would not get the compensation for shortfall in revenue (they can only borrow) and the cess would continue well beyond 2022. A clear burden on the consumers (indirect tax payers) and the states. The Centre has an explanation: ''The gap arising in compensation (is) due to the extraordinary situation and Act of God in the form of #COVID19.”

That is what has been proposed by Finance Minister Nirmala Sitharaman who is also the chairperson of GST Council, which met digitally, on August 27.

States (Non-BJP ruled) are rightfully turning back. "Arre !! you owe us money. You can borrow from RBI and pay us; instead you want us to borrow.”
The crux of the matter is both Centre and the states are broke.

The GST Council, which had a good history of decision by consensus, thanks largely to former Finance Minister late Arun Jaitley, gifted with his ability to listen and be-listened. But state finance ministers, whether Thomas Isaac from Kerala or Amit Mitra from West Bengal have issues not only with the outcome of the last GST Council meeting in the form of proposal but also the manner in which it went about. In a television interview, Isaac went to the extent of stating it was ''manipulated''.

The RBI should be more comfortable lending to the Centre than different states, which are in different financial health. Some are completely broke. In any case, the nation has to bear the burden of debt either way - whether the borrowing is done by Centre or states. Common citizen understands the precarious financial situation arising out of lockdown, followed by restrictions at different levels of administration. If borrowing has to be done, it must fall upon the head of the family or the Centre in this case. The burden will fall on the taxpayers, anyways.