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Thomas Isaac Says GST Compensation Issue Has A ‘Lesson For States To Learn’

States must demand the setting up of a dispute resolution mechanism to resolve indirect tax-related differences, Isaac said.

File photo of Kerala Finance Minister Thomas Issac. (Source: BloombergQuint)
File photo of Kerala Finance Minister Thomas Issac. (Source: BloombergQuint)

Kerala would continue its own legal consultation as the GST compensation issue “has a lesson for states to learn”, which must demand the setting up of a dispute resolution mechanism to resolve indirect tax-related differences, its Finance Minister Thomas Isaac has said.

It’s better for “smoother” functioning of the GST Council to institute a dispute resolution mechanism, Isaac told BloombergQuint in an interview.

There will be differences in opinion based on political positions, and if there are issues which lead to strong differences, a majority-based decision can be taken, he said. “There’s nothing undemocratic about it.”

The decision of the majority will be binding on everybody, but there will still be a dispute, and there should be a democratic way of resolving that dispute, he said. The dispute resolution mechanism would mean states wouldn’t have to move court to resolve them, he said.

About eight states were contemplating to move Supreme Court against the central government to block its decision to make states borrow to meet the GST compensation shortfall. The central government, on Oct. 15, climbed down from its earlier stance and said it will borrow from the market and give back to back loans to states.

“The centre and states are now jointly taking the loan,” Isaac said. However, Kerala will still hold discussion with the central government to negotiate the amount that needs to be borrowed, he said.

With the present arrangement to borrow Rs 1.1 lakh crore, about Rs 60,000 -65,000 crore would still be the unbridged gap in compensation which states would be given only after 2023.

That’s because out of the total shortfall of Rs 2.35 lakh crore, about Rs 1.83 lakh crore needs to be given as GST compensation to states this year, as the payout for February and March 2021 will be due in the next fiscal. Part of the remaining Rs 73,000 crore is expected to be collected through better GST collections, leaving behind only a gap of Rs 60,000-65,000 crore.

Since increase in the borrowing amount isn’t impacting the central government’s fiscal deficit, the remaining Rs 60,000-70,000 crore should also be borrowed and given to states, Isaac said. “This is the time for states to spend for lifting the economy.”

Union Finance Minister Nirmala Sitharaman has written to states saying Rs 1.06 lakh crore, or 0.5% of GDP, would be available for states to borrow without any condition. Therefore, states would have total resources of Rs 1.10 lakh crore in addition to Rs 1.06 lakh crore under borrowing option 1, she wrote. BloombergQuint has reviewed a copy of the letter.

States were anyway asking the central government to make the 0.5% additional borrowing limit unconditional, Issac said. This additional borrowing limit has got nothing to do with GST compensation, he said, adding that states will still find it difficult to raise money from the market due to the current situation.

Watch the full interview here: