A day after the goods and services tax council decided to offer states two options for borrowings to go ahead to deal with the inadequate funds to pay compensation to states, the move has not gone down well with state finance ministers.

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Several state finance ministers CNBC-TV18 spoke to are not in favour of either of the two options.

The two options before states are:

Firstly, a special window can be provided to the states, in consultation with the Reserve Bank of India, at a reasonable interest rate for borrowing Rs 97,000 crore and a relaxation of 0.5 percent under the Fiscal Responsibility and Budgetary Management (FRBM) limits.

The second option is to borrow the entire Rs 2.35 lakh crore shortfall under the special window.

The amount and the interest in either of the two options can be repaid after five years (of GST implementation) ending 2022 out of cess collection, or by the expansion of items under cess kitty or by hiking cess rates on specific products.

If a state goes for option 1, it will borrow less, but its compensation entitlement will be protected, she added. So the choice is between borrowing less and getting cess later or borrow more and pay for it using cess collected during the transition period, said Finance Minister Nirmala Sitharaman.

A special window with RBI will be facilitated by the Centre and the borrowing rate will be pegged with G-Sec rates, Sitharaman said.

"States have been given seven days' time to think over the proposal," the Finance Secretary added.

But, a day after the council meeting, Punjab Finance Minister Manpreet Badal told CNBC-TV18 that “Punjab has decided to reject both options provided by the Centre to meet GST Compensation.”

Kerala Finance Minister, Thomas Isaac also expressed similar views and said “both options are not acceptable".

“The attempt of Centre to introduce a distinction in revenue shortfall as due to implementation of GST and as that caused by COVID and that the latter doesn’t deserve to compensated fully is not constitutionally valid. Constitution makes no such distinction," Isaac said.

"In both options for GST compensation proposed by the Union Finance Minister, states will have to sacrifice a part of the compensation. In the first option only 0.5 percent additional borrowing is permitted for Rs 1.65 lakh crore due. Full compensation is a constitutional right of the states," he said.

"The Centre’s proposal made simple: Total GST shortfall for 2020-21 Rs 3 lakh crore. Cess collection Rs 70,000 crore, leaving a gap of Rs 2.3 lakh crore . Centre to borrow Rs 1.65 Lakh crore. States to borrow Rs 1.65 Lakh crore for which state’s fiscal deficit ceiling has to be raised by 25 percent. But promised raise is only 17 percent. Thus states will lose Rs 50,000 crore. I think there will be voting on this. They don't have the numbers in the council. In both proposals, states are losing,” Isaac said.

Not just Kerala and Punjab, even Delhi feels that the two options do not hold merit. Delhi Deputy Chief Minister and Finance Minister Manish Sisodia told CNBCTV18 that “The Central government has refused to take loans for any state and due to its unique status, Delhi cannot take a loan. They are showing double-standards with the people of Delhi. Under GST, the central government was liable to give compensation to states for five years but today, they have refused to do so. States are feeling cheated right now.”

As per The Centre’s estimates, the annual GST compensation requirement for FY21 is estimated to be around Rs 3 lakh crore, and cess collection is expected to be around Rs 65,000 crore, considering the current revenue trends, leaving the council with an annual compensation gap of Rs 2.35 lakh crore.

Of the Rs 2.35 lakh crore shortfall, Rs 97,000 crore would be because of a decline in GST collection and the rest attributable to the pandemic, Finance secretary Ajay Bhushan Pandey told press post the GST Council on 27th August.

Council also estimates that the Centre will need at least 3 more years of compensation at current rates and items to pay out the borrowings made in the name of states to make good for their compensation requirements.

If we look at Rs 2.35 lakh crore of borrowing then it amounts to 1.15 percent of the GDP.

First Published:Aug 28, 2020 6:01 PM IST