As the Centre and states continue to deliberate on how to make good for the inadequate funds in the GST compensation kitty, Kerala and West Bengal on Wednesday wrote to Prime Minister Narendra Modi seeking his intervention in the matter.

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However, Karnataka wrote to the Centre and expressed interest in going with the first option suggested by the GST Council i.e. “to borrow up to Rs 97,000 crore, which is the shortfall in the GST revenue compensation”.

The other option suggested is “to borrow the entire Rs 2.35 lakh crore, which is the total shortfall, including the impact of COVID-19”.

Meanwhile, the Centre on Tuesday held discussions with state finance secretaries where it clarified various doubts regarding the two options. According to highly placed sources, the clarifications were made by Finance Secretary and other senior officers from North Block.

"States asked Centre some specific queries including, 'when will the funds be credited for the current year? By when borrowings can be done if states decide to opt for borrowing? How will the borrowing window work under the RBI? How does the government plan to process the repayment of borrowing? Will the borrowed funds be credited directly to the states? Will the borrowed funds go to the compensation cess kitty first?’,” sources said.

When asked, senior officials dealing with the matter said: "The Finance Ministry has told states that funds borrowed will be credited to states and would not be transferred to the compensation cess kitty."

As per the proposal of the Finance Ministry, under the first option, repayment will be facilitated from the cess kitty. While under the second option, only the principal amount will be repaid from cess and the interest will have to be paid by each state.

Sources added: "Close to 10 states expressed that either of the options do not suit their state and some large BJP-ruled states sought more time to assess the two options."

Finance Minister Nirmala Sitharaman at the press briefing of the 41st GST Council meet on August 27 had said that the contours of repayment of borrowing by either extension of cess or by hiking rates is a call that the council will take post the selection of the option.

This apart, during the day, Kerala Chief Minister Pinarayi Vijayan wrote to PM Modi asking him to advise Finance Ministry not to go ahead with the plans of transferring the burden of GST compensation to states.

"The Centre should follow the letter and spirit of the Goods and Services Tax (Compensation to States) Act, 2017. Two borrowing options sent by Finance Ministry goes against the compensation spirit,” Vijayan wrote.

"I write this letter to convey the concerns of the Government of Kerala with regard to the hurdles in the payment of Goods and Services Tax (GST) compensation to the states,” the Kerala CM added.

States were assured 14 percent revenue with 2015-16 as the base year during the initial five years of GST implementation. From April 1, 2020, no compensation has been paid, Vijayan wrote.

"Rs 7,7000 crore was due to Kerala during the period April to August 2020. It is felt that transferring the obligation of GST compensation to the States through their borrowing is not in accordance with the spirit of understanding reached between the Centre and the States," Vijayan said in his letter to the PM.

Apart from Karala, West Bengal Chief Minister Mamata Banerjee too wrote to PM on the issue, urging the PM's intervention to "rekindle the trust between states and Centre at the GST Council".

The Centre must borrow to meet the shortfall at this crucial hour of COVID-19 and the Cess collections can continue beyond five years until the entire debt is liquidated with the interest, Banerjee wrote.

She added that the Centre has powers to monetise debt, but states do not have such powers. Also, the benefit of central borrowing is low interest rates, the Centre can raise resources to service its debt.

Deeply anguished by the GST imbroglio, Banerjee said that the issue “is tantamount to a betrayal of trust" and moral responsibility of Centre towards states.

She stated that the Centre was violating the spirit of 'Federalism'. She quoted the words of late finance minister Arun Jaitley and said saying that his words are "ringing in our ears as we are losing trust on BJP government at the Centre, in honouring its solemn promise of fully compensating GST losses to the states".

Banerjee in her letter said that despite assurances from the Centre, states are being "thrust with two unilateral options, both of which require the states to borrow lakhs and crores of rupees, when many of them are unable to pay salaries".

She added that the attorney general (AG) was not brought in to give a legal view during implementation of GST and bringing in AG now for a legal opinion is an "act of subterfuge to undermine the trust reposed by states".

The WB CM continued, "it appears to be an onslaught on the democratic and federal structure of the country". Thus, she urged the PM not to "Billie the trust between states and Centre on matters of GST" and "not to allow an insufferable blow to the federalist polity of our nation".

But, in contrast to Kerala and West Bengal, the Karnataka government has rather communicated that the state is in favour of going with the first option provided by the GST Council. The Karnataka government said: "After the evaluation of both these options, it is felt that option 1 would be more beneficial to State's finances… Hence Govt of Karnataka has decided to convey to Government of India its preference for option 1."

In a press statement, the Karnataka government said that it has communicated to the Centre that the first option will help Karnataka to augment revenues in the current fiscal.

Giving the rationale about their preference, Karnataka government said, "Under option 1, Karnataka will be eligible for total compensation of Rs 18,289 crore. Out of this Rs 6965 crore would come from Cess and the remaining Rs 11,324 crore would be the state borrowing from the special window."

Additional borrowing up to 1 percent of GSDP (Rs 18,036 crore) will be available unconditionally and another 1 percent borrowing can be done linked to certain reforms. These additional borrowings can be carried forward to the next fiscal if needed, the Karnataka government said.

First Published:Sept 2, 2020 6:46 PM IST