GST Compensation Shortfall Should Be Met Via Central Government Borrowing, Says Punjab Finance Minister

After increasing the ambit of GST Compensation Cess—used to compensate states for losses due to rollout of the goods and services tax—the shortfall in payment of dues to states should be met through market borrowings by the central government.

That’s according to Punjab Finance Minister Manpreet Singh Badal, who’s urged Union Finance Minister Nirmala Sitharaman to make the compensation cess ‘ad-valorem’ and by imposing compensation cess on luxury items on which GST was reduced from 28%, the highest slab, to improve collections from compensation cess.

Badal has also said the central government should subsume the central excise on cigarettes and tobacco, introduced in the last Union Budget, into the compensation cess.

By making these adjustments, if there’s a shortfall for compensating states, the central government should borrow from the market as it will be “efficient in terms of cost of borrowing”, he wrote in a letter that was reviewed by BloombergQuint.

The central government compensates states bi-monthly after certain levies like value added tax was subsumed under the GST. The compensation is guaranteed for five years, and is calculated at a growth rate of 14% keeping 2015-16 as the base year. With declining indirect tax collections last year due to a demand-led slowdown, the government had stopped releasing the bi-monthly compensation to states. This was on account of inadequate collections from GST compensation cess that’s levied on sin or demerit goods. The law currently says compensation to states can be given only through compensation cess fund.

The letter from Badal comes after Finance Secretary Ajay Bhushan Pandey told the Parliamentary Standing Committee that the government can’t compensate states due to low GST collections. The attorney general weighed on the issue, saying that it’s not the central government’s obligation to pay for shortfall in GST compensation to states, and states have the option to borrow funds from the market, the newswire PTI reported.

Badal wrote that the GST (Compensation to States) Act is a central legislation, and provides for the Centre to compensate states for losses incurred by states in first five years of implementation of the indirect tax. The Act says compensation to states can be given also through “through any such other amounts as may be recommended by the GST Council”. Thus, compensation doesn’t have to come from cess itself, he wrote.

If states are made to borrow, they may not be able to bear the burden, and the rate of borrowing for them will be higher, according to the letter.

Badal wrote that he’s confident that the entire issue will not be looked at only from the point of a narrow legal interpretation, but as a statesman.