‘No Surrender’ In GST Compensation Battle: Kerala Finance Minister Thomas Isaac
Kerala Finance Minister Thomas Issac speaks during an interview. (Source: BloombergQuint)

‘No Surrender’ In GST Compensation Battle: Kerala Finance Minister Thomas Isaac

"I feel angry for being taken for a ride by the central government," said Thomas Isaac, finance minister of Kerala, on the GST compensation issue. Kerala, he said, agreed to the implementation of a goods and services tax against the best political judgments of getting into a deal with the centre. “I feel so angry with myself. Let’s see what comes. But, no surrender.”

Both, the form and substance of the two options offered by the centre have riled Isaac. The manner in which these options were presented and that they leave states with no option but to cut expenditure, are unacceptable to Kerala, the finance minister said.

“This is what I call lack of statesmanship, brinksmanship. You want to quarrel with the states, you want to needle them,” he said, questioning the centre’s oft-stated promise of cooperative federalism.

Kerala has rejected both options presented by the centre last week.

Centre Vs States

At the time of GST implementation in 2017, the centre committed, via a constitutional amendment, to compensate states for any shortfall on account of GST at a 14% increase per year over 2015-16 revenues. The amendment provides for five years of compensation, July 2017-2022. The centre collects revenue for such compensation by levying a compensation cess on select items.

This year on account of a slowing economy and the Covid-19 impact, the centre has estimated a Rs 2.35-lakh-crore shortfall in compensation cess revenue. But, it interprets the constitutional amendment to say, only Rs 97,000 crore of this is on account of GST implementation, the rest is due to Covid-19 or an ‘Act of God’ as Finance Minister Nirmala Sitharaman put it.

The centre argues that if it borrows to cover the shortfall yields will be impacted and there will be “other macroeconomic repercussions” and hence it is in “collective interest” that states do the borrowing. Hence, it has presented two options to the states.

Under Option 1, if states choose to borrow Rs 97,000 crore they will get a host of benefits including access to a special Reserve Bank of India borrowing window, close to G-sec yields and no debt servicing liability. Other incentives apply.

Under Option 2, if states decide to borrow the entire amount of the estimated shortfall in compensation cess (Rs 2.35 lakh crore) it will have to be from the market and they’ll have to service the interest on such debt from their own resources. Other restrictions apply.

Also read: GST Compensation: Fineprint Of The Two Options Offered By Centre To States

Act Of God?

Isaac said he has already presented the state budget which factors in Rs 2.35 lakh crore (Kerala’s share of it). “Now suddenly the central government comes up with this distinction between acts of god and what normally would have been the shortfall. The Constitution does not make such distinction. In fact, it’s an afterthought.”

Isaac said even the Attorney General, whose view has been cited by the centre, has accepted the states’ right to have this compensation. And while the AG said the compensation should come from the GST Compensation Fund and not the Consolidated Fund of India, he has made no distinction in the types of compensation.

India is such a vast country, in any month there would be some state in a drought or flood or some act of man or god, the state finance minister said. Each time collections fall, will the centre say it is an abnormal situation and hence compensation should be cut?

Isaac made the point that in the first two years of a surplus in compensation cess collections, the government credited it to the Consolidated Fund of India (the government has said it stayed in the GST Compensation Fund) and the undistributed IGST is also in the Consolidated Fund of India.

"Our argument has been that is being used to bolster the public account of Government of India," he said.

Have some grace, some statesmanship. The states are not outside the union. The states were given a solemn promise that you will be compensated. Now you bring in a distinction like this.
Thomas Isaac, Finance Minister, Kerala

Both Options Rejected

Isaac questioned the economic outcome of the centre’s approach at a time when the economy is facing a severe contraction. Option 1 assumes an overall cut of Rs 1.38 lakh crore in states’ expenditure. “What kind of macroeconomics is this?”

In a country where majority people don’t get healthcare, primary education, basic needs, cutting expenditure, especially at a time like this, is an “extremely bad idea”, he said.

The second option is better in that it does not distinguish between acts of god and acts of man, but it permits only market borrowing and puts the burden of interest payments on the states. Whereas in the first option debt servicing will be done from compensation cess collected.

Why can’t the interest burden in option 2 be met from the cess fund, Isaac questioned. He described the centre’s approach as “needling states”.

We want to cooperate with the centre, that’s our record in the GST Council. But now it has come to a stage where we have to say sorry, you don’t believe in cooperative federalism. You want confrontation.
Thomas Isaac, Finance Minister, Kerala

Isaac did not agree that states should do the borrowing as additional borrowing by the centre would influence yields. He argued that in either case the combined fiscal deficit would anyway rise. Besides, the centre has the option to monetise the debt, he pointed out. “If they (centre) are so afraid of the calamitious things that would happen to India, why they had no qualm to give Rs 1.75 lakh crore via corporate tax reduction.”

Today, first quarter GDP data for financial year 2020-21 shows a 23.9% contraction. Whereas the centre’s fiscal deficit has breached its full year target in the first four months itself.

Also read: GST Compensation: Amit Mitra Says States Have No Headroom To Take On Any New Debt

Next Steps?

Isaac described the GST Council meeting held last week as being taken on a “five-hour ride”. All but two states, according to him Assam and Goa, were of the consensus view that full compensation should be paid. “This was the sense of the house”. Instead of taking that spirit forward, he said, the centre sprung a surprise and spoke of two options that nobody could make sense of.

If the centre had come with predetermined notions they should have presented it in the beginning so that states could understand them right then, he said. “Is this the way to run the GST Council?”

Several state finance ministers are meeting today to discuss the next steps in this standoff. West Bengal, Punjab, Chhattisgarh and other states governed by non-BJP governments have also expressed their opposition to the centre’s options.

"I hope the central government will rethink its position," Isaac said. It shouldn’t make a distinction between Covid and non-Covid factors and it should choose the discussion route over the ultimatum route, he said.

This facade has to stop. We are not going to back down. Let’s see. If it is not settled here (discussions and GST Council) we’ll go to the court. Let the states of India go and file a case in the Supreme Court against the central government. This is a bad day for India and Indian federalism that things have come to such a state.
Thomas Isaac, Finance Minister, Kerala


Watch the full interview with Kerala Finance Minister Thomas Isaac here.

Also read: GST Compensation: Defer Centre’s Outgo, Don’t Deny States Their Due - Drabu

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