No Consensus Over Compensation Issue At GST Council Meet

The meeting of the GST Council remained inconclusive on the borrowing that needs to be made to compensate states on their shortfall, with Finance Minister Nirmala Sitharaman stating the central government will facilitate borrowing for states that approach them.

Sitharaman, briefing reporters after the GST Council meeting on Oct. 12, said although there was no unanimous decision, majority of the states have agreed to option 1, where states can borrow up to Rs 1.1 lakh crore through a special window facilitated by the Reserve Bank of India.

Other states are of the view that a consensus should be reached, Sitharaman said. However, she said that a lot of members discussed whether the GST Council has any authority to stop states from going and borrowing funds. “Whilst I respect there is no unanimity, can a member of the council stop another state from what it wants to do?” she asked.

Sitharaman also said she would be ready to engage with states that are ready to move forward with option 1, and borrow funds. She said just because a unanimous decision is not reached, it shouldn’t hold back states that are in need of money and are ready to borrow.

“It’s illegal what she is proposing, as per the opinion of Attorney General, the GST council has to decide how states need to be compensated,” said Kerala Finance Minister Thomas Isaac.

Isaac told BloombergQuint that the Union Finance Minister refused to let the council take a decision. He said if majority of states vote for a proposal, the decision is binding on all states. “But she has politicised the GST proceedings.”

Punjab Finance Minister Manpreet Badal told BloombergQuint that states asked for setting up of a group of ministers, and a dispute resolution mechanism to resolve the issue, but their requests weren’t allowed. “We asked for a division on the borrowing options, but that was denied too,” Badal said. “What they’re doing legally not correct.”

States intend to block this decision in the Supreme Court, said Isaac. Badal said he would report back to the state’s chief minister and the cabinet to discuss steps to protect the state’s interests even if it involves moving the top court.

Centre Can’t Borrow

The central government cannot increase its borrowing to pay off the states’ GST dues as the borrowing calendar has already been announced, Sitharaman said.

“If I increase borrowing beyond what is planned, it will immediately jack up the G-sec yields. If that happens, the borrowing costs will go up,” Sitharaman said. “If states are made to borrow, the problem will not be that severe.”

Economic Affairs Secretary Tarun Bajaj, who was also present at the briefing, defended the federal government’s stance of not borrowing more to pay states their dues by pointing to the fact that its fiscal position is already strained. “It’s better if we don’t expand central fiscal deficit beyond a point.”