Centre Outmanoeuvres States On GST Compensation Issue
A performer holding prop swords jumps in the air during a rehearsal for a show in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)  

Centre Outmanoeuvres States On GST Compensation Issue


In the end, India’s states will borrow to compensate themselves.

After two long months of negotiations, the central government has convinced some states to raise their own funds. To others, it has shrugged and said do what you like.

In the words of the Union Finance Minister Nirmala Sitharaman, “Whilst I respect there is no unanimity, can a member of the GST Council stop another state from what it wants to do?”

What does that mean? A few things.

1. The centre is resolute in its decision not to borrow. Constitutional amendment be damned. The promise, to compensate states for loss of revenue on account of GST implementation, served its purpose to get states to agree to the new tax. Now that it faces its first test – the centre has taken cover under Covid.

But you knew that already. Isn’t that why it presented states with two options?

2. Options that exist only on paper. First, both options involve borrowing by states. One comes with incentives, such as an interest subsidy and a facilitation window. Obviously, most states, governed by the BJP or its allies, have picked that first option. But two months since these options were presented there is still no clarity on how this ‘window’ will work, how much states will be able to borrow and how much it will cost them. All Economic Affairs Secretary Tarun Bajaj had to say on Monday was – “When the states come to us we will estimate the shortfall each state will face and what compensation is due. It will be our effort to ensure that states get a good rate”.

3. That commitment is only a verbal one. The centre prevented the GST Council from voting on the borrowing proposals. “We asked for a division on the borrowing options, but that was denied too,” said Punjab Finance Minister Manpreet Singh Badal.

It’s not clear why, as all along the Union Finance Ministry has claimed most states are in its favour. Surely if, as they claim, 21 of 31 states were happy to pick option one, then the vote was a mere formality. In fact, Thomas Isaac, the finance minister of Kerala, which is among the 10 dissenting states, had made clear that a vote, whichever way it went, would be binding on all.

What a vote would have also done is formalise option one, allowing states to hold the centre to its proposal.

4. But not only were demands for a vote disregarded, the centre played a new card – that the GST Council had no business voting on the two proposals. Or as Sitharaman put it - “I don’t think anyone can allow states or disallow states on what they want to do.”

Odd, because her predecessor had said exactly the opposite.

In the 8th GST Council meeting, in 2017, then Finance Minister Arun Jaitley had said: “…..in case the amount in the GST Compensation Fund fell short of the compensation payable in any bimonthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by a collection of cess in the sixth year or further subsequent years”. (emphasis added)

It isn’t as if the Finance Ministry has forgotten Jaitley’s words. They cited him two months ago in a statement detailing the two options. And said, “The Government of India stands by the statement of Shri Jaitley”. It was a smart negotiating tactic.

5. Because in the meeting on Oct. 5, the GST Council unanimously agreed to extend the cess period indefinitely, so as to recoup shortfalls till 2022 and recoup cost of borrowing to temporarily cover those shortfalls. With that out of the way, the centre seems to have decided that honouring one part of Jaitley’s statement was courtesy enough.

Why, even the Attorney General of India, as per the same statement, has opined that “the (GST Compensation) Act does not require the Government of India to bear the liability of making good the shortfall and that it is the GST Council which has to decide on making good the shortfall”. (emphasis added)

But, as Sitharaman put it, who can tell states what to do?

Not the GST Council for one.

6. If dissent in the Council, even if it’s in a minority, can be easily disregarded. If as important an issue as compensation, that was forged into the constitution itself, can be handled thus - then what’s the purpose of the GST Council? Consensus building was a badge Arun Jaitley wore proudly, as I wrote in an earlier column. Now consensus seems to matter only if states play along with the centre.

What else can states do? The GST clock can’t be turned back. Any dispute resolution will be long drawn out. States need money now. The centre knew that. To be sure, it had the strongest hand and played it shrewdly. Scoring a take-no-prisoners win.

At the end of two long months, some will admire the centre’s negotiating chutzpah, others will empathise with states backed to the wall. But what all must know is that if the Goods and Services Tax was flawed, it is now deeply fractured. And with it India’s federal structure.

A grim reminder to those who agree to replace rights with entitlements.

Menaka Doshi is Managing Editor at BloombergQuint.

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