Few states call for “Re-ordering” of GST distribution framework

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Non-BJP ruled States and those ruled by the Opposition parties have called for a reordering of the GST distribution framework. They have also sought an extension of the term for eligibility for compensation, given the varied problems associated with GST implementation, which,was work-in-progress at best. Distribution of taxes under GST should be fixed at 60% for the States and 40% for the Centre (currently these are 50:50) and States should be allowed to tweak the rates by up to 2% within their jurisdiction when IGST and SGST rates are the same across the country.

Kerala Finance Minister Thomas Isaac said there is no question of compromising the constitutional right of the State to claim its due share of GST compensation to the extent committed by the Centre through amendment of the relevant Act. At the time of GST implementation in 2017, the Centre had committed to compensate States for any shortfall on account of GST at a 14% increase per year over 2015-16 revenues. The amendment provides for 5 years of compensation, July 2017-2022.

The Constitution does not either distinguish between an Act of God, Nature or Man to trigger the flow of compensation funds. The State governments will not accept any formula to circumvent established provisions of law or countenance any sleight of hand by the Centre. According to Isaac, participants at the webinar agreed that State governments are not willing to settle for anything less than full GST compensation as enshrined in the Constitution. And this cannot be set off against any routine loan/grant or any special window for any such in future. 

The Centre has estimated a ₹2.35-lakh-crore shortfall in compensation cess revenue from Covid-19. But only ₹97,000 crore of this is on account of GST implementation while the rest is due to an ‘Act of God’ (Covid-19). The Centre argues that if it borrows to cover the shortfall, yields will be impacted and there will be other macroeconomic repercussions and hence it is in collective interest that States do the borrowing. It presented two options to the States. Under option 1, if the States choose to borrow ₹97,000 crore, they will get a host of benefits including access to a special RBI borrowing window and no debt servicing liability. Other incentives will also apply.

Under option 2, if the States decide to borrow the entire amount of the estimated shortfall in compensation cess (₹2.35-lakh crore) it will have to be from the market and they’ll have to service the interest on such debt from their own resources. Other restrictions apply.

 

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