Nirmala Sitharaman Press Conference: Despite Marathon Meetings, GST Council Remains Split Over Compensation Issue

The GST Council failed to reach a consensus over the issue of how states will be compensated for their revenue shortfall, even after discussing the issue at length for a third consecutive meeting.

“There was no consensus arrived by the end of the meeting,” Finance Minister Nirmala Sitharaman said in a press conference.

Sitharaman said that majority of the states have agreed option 1 where states can borrow up to Rs 1.1 lakh crore from a special window facilitated by the RBI. Other states are of the view that a consensus should be reached.

However, Sitharaman said that a lot of members discussed whether the Council has any authority to stop them 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?”

The finance minister said that if any states are ready to move forward with option 1 and borrow funds then she would be ready to engage with them. Sitharaman said that just because a unanimous decision is not reached, it should not hold back states who are ready to borrow and are in need of money.

“I don’t think anyone can disallow what states can do. There were views on why centre can’t borrow, to which a response was given. I don’t think the GST Council’s intent is to stop anybody,” the finance minister said.

Watch the finance minister’s press conference here.

The Goods and Services Tax Council met again to discuss the contentious issue of compensation as the central government aims to reach a consensus with the non-Bharatiya Janata Party-ruled states.

The council's decisions are expected to be announced in press conference by Finance Minister Nirmala Sitharaman shortly.

This is the third time in a row that the GST Council is discussing the issue of funding a shortfall of tax revenue of states. In its previous meeting last week, the council had decided to extend the surcharge on taxes on luxury goods such as cars and tobacco products beyond June 2022 but failed to reach a consensus on ways to compensate states for loss of tax revenue.

The projected total compensation shortfall in the current fiscal stands at Rs 2.35 lakh crore.

The central government in August gave two options to the states to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from the market and had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.

Following demand by some states, the amount of Rs 97,000 crore was increased to Rs 1.10 lakh crore.

As many as 21 states—which are BJP ruled or have supported it on various issues—have opted to borrow Rs 1.10 lakh crore to meet the compensation shortfall.

Ahead of the GST Council's meeting, Finance Minister Niramala Sitharaman made a series of announcements aimed at increasing consumption ahead of the lucrative festive season.

From a travel concession scheme to a special Rs 10,000 advance for government employees, the Finance Ministry has decided to front-load spending through a one-time disbursement.

Besides, the government has tried to front-load capital expenditure by states that will now get Rs 12,000 crore in interest-free loans for a period of 50 years with the condition that the money be spent before March 31, 2021. That will be over and above the borrowing limits for states.

The announcements will help the central government score some "debating" points when it goes into the GST Council meet, said Govinda Rao, a member of India's 14th Finance Commission, and former director of National Institute of Public Finance and Policy. "The centre now goes into a GST Council meeting by saying that it is giving states additional money to spend as capital expenditure," Rao told BloombergQuint.

That, according to Rao, will not make a huge difference since the compensation amount is much more than the additional money that the government is offering. "There is already a lot of bad blood there, and the amount of money involved in the GST compensation is much larger. This type of symbolic amount of money will not make a great deal of a difference."

Finance Minister Nirmala Sitharman said that the GST Council today discussed various issues of borrowing options that states have and extension of cess.

The states continued to voice their opinions and sought clarifications, the finance minister said.

Sitharaman also said that states thanked the centre for the capital expenditure funds announced earlier in the day.

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."

Majority of states had chosen option 1, and they were asking the centre to speedily get money, Sitharaman said. "There are some other states asking to take a decision in consensus."

Economic Affairs Secretary Tarun Bajaj said that the centre devolved taxes to states based on the recommendations of the 15th Finance Commission despite a shortfall in tax revenue due to the Covid-19 pandemic.

Bajaj defended the centre's stance of not borrowing more to pay states their dues by saying that the government's fiscal position is already strained. "It is better if we do not expand central fiscal deficit beyond a point."