13 states seek to borrow to meet GST gap

The fiscal woes of the central and state governments appear to have dealt a blow to the consensus-based approach

At least 13 states have conveyed their preferred borrowing options that were discussed at the Goods and Services Tax (GST) Council’s meeting last month for meeting their GST revenue gap.

An additional six are expected to give their options in the next two days, said a person privy to the development. Of the 13 states that have already given their borrowing preferences, only Manipur opted for the second borrowing option that allows the state to borrow its entire GST revenue shortfall, including the gap in revenue receipts caused by the coronavirus pandemic.

The other 12—Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Madhya Pradesh, Meghalaya, Sikkim, Tripura, Uttar Pradesh, Uttarakhand and Odisha—have opted for borrowing funds from an RBI window that would cover the GST revenue shortfall that can be attributed to the implementation of GST, said the person who spoke on condition of anonymity.

The six other states—Goa, Assam, Arunachal Pradesh, Nagaland, Mizoram and Himachal Pradesh—are expected to give their options shortly.

A few states, which are yet to decide on the options, have submitted their views to the chairperson of the GST Council—Union finance minister Nirmala Sitharaman.

Non-BJP ruled states, including Kerala, West Bengal, Punjab and Delhi, have already turned down both the borrowing options and are urging the Union government to borrow and pay states instead of asking states to borrow themselves.

The central government recently clarified to states that it was committed to fully honour the shortfall in revenue, which entails the payment of revenue losses that can be attributed to GST implementation within the five-year transition period itself (2017-22) while the revenue lost due to the coronavirus impact can be paid thereafter by extending the GST cess on luxury and sin goods beyond 2022.

With these states taking an uncompromising posture so far, the next GST Council meeting is expected to be stormy.

The Council has 33 members, including the chairperson and Union minister of state for finance Anurag Thakur. So far, all the decisions in the council, barring one on taxation of lotteries, have been taken by consensus. The fiscal woes of the central and state governments appear to have dealt a blow to the consensus-based approach. In the federal tax body, neither the Centre nor the states together can take a decision without the support of each other.

According to the central government, there is enough space for the states to borrow as on an average, states have borrowed so far only about 1.25% of the gross state domestic product (GSDP) and only a few states have reached around 2% of the GSDP.

Besides, the Centre has already enhanced borrowing limit from 3% to 5% of GSDP. The central government argues that borrowing by the Centre would have a higher impact on the market and push the G-Sec rate, the benchmark rates for other borrowings, including borrowing by state governments. Therefore, any borrowing by the Centre would crowd out borrowings by the private sector and would make borrowings costly for entrepreneurs.