States shouldn’t be asked to borrow from market to fund GST shortfall: West Bengal FM to Nirmala Sitharaman

The GST Council will meet on Thursday to discuss the issue of compensation payment to States in the backdrop declining revenues.

West Bengal Finance Minister Amit Mitra on Tuesday wrote to Union Finance Minister Nirmala Sitharaman saying States should not be asked to borrow from the market to make good the shortfall in GST revenue collection.

“The Centre must pay the compensation from the different cesses that it collects, as it is not getting devolved to the States. In case of shortfall it is the responsibility of the Centre to garner resources for fully compensating the States, as per the formula agreed upon with the states,” Mr. Mitra wrote.

Stating that there can be no going back on compensation payment, Mr. Mitra said the 14% rate is “sacrosanct”.

“Under no circumstances, States should be asked to borrow from the market as it will increase their debt servicing liability. Further, it may lead to cut in State expenditure which is not desirable at this juncture when the economy is witnessing severe recessionary trend,” Mr. Mitra said.

The GST Council will meet on Thursday to discuss the issue of compensation payment to States in the backdrop declining revenues.

The Centre had released over ₹1.65 lakh crore in 2019-20 as GST compensation.

Under GST law, states were guaranteed to be compensated bi-monthly for any loss of revenue in the first five years of the GST implementation from July 1, 2017.

The shortfall is calculated assuming a 14% annual growth in GST collections by States over the base year of 2015-16.

Mr. Mitra further said that Goods and Services Tax (GST) was introduced on the basis of “mutual trust” between the Centre and States.

“Some dent in this trust has already been made due to delayed payment of GST compensation. Let us not do anything that will give a death blow to this unique collective effort,” Mr. Mitra said.

He said that with GST introduction, states collectively surrendered 70% of taxing power.

“It appears that our worst fears are now coming true. It is surprising that the Constitutional guarantee given to the States is being interpreted in a manner that the Centre is not responsible to compensate the States and it is the States (in the GST Council) which will have to find means to compensate themselves! Nothing can be more damaging, unfair and unjust than this,” Mr. Mitra wrote.

The Centre had in March sought the Attorney General’s view on the legality of market borrowing to make good the shortfall in compensation fund — a corpus created from levy of additional tax on luxury and sin goods to compensate States for revenue shortfall arising from their taxes being subsumed into GST.

Attorney General K.K. Venugopal had opined that the Centre is not legally bound to make up from its coffers any shortfall in GST revenues of States.

Sources had earlier indicated that following the AG’s opinion, states may now have to look at market borrowings and the GST Council will take a final call.

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