GST Shortfall: Proposal of Borrowing Clear Breach of Constitutional Assurance, Says Punjab Finance Minister Manpreet Singh Badal

Chandigarh, August 31: Punjab Finance Minister Manpreet Singh Badal on Monday outrightly rejected the Centre's proposal of borrowing by states to meet shortfall in GST revenue and dubbed it as a "clear breach of the solemn and constitutional assurance and betrayal of spirit of cooperative federalism".

In a letter to Union Finance Minister Nirmala Sitharaman on Monday, Badal asked her to reconsider the decision, which was taken at the last Goods and Services Tax Council (GSTC) meeting. Also Read | India's Core Industrial Output Down 10% in July Due COVID-19 Pandemic.

Badal sought another urgent meeting to seek "full clarity" on the issue and also demanded the constitution of a group of ministers to "deliberate on the matter and make recommendations in a time-bound period of 10 days".

The Centre and Opposition-ruled states like Punjab, Kerala, Delhi and West Bengal are at loggerheads over the financing of the Rs 2.35 lakh crore Goods and Services Tax (GST) shortfall in the current fiscal. Also Read | Realme V3 Smartphone Likely to Be Launched Tomorrow Alongside Realme X7 Series.

Of this, about Rs 97,000 crore is on account of GST implementation and rest Rs 1.38 lakh crore is the impact of COVID on states' revenues. The Centre last week gave two options to the states to borrow either from a special window facilitated by the RBI or from market and has also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022.

The Punjab finance minister drew attention towards the statements of the then chairperson that the compensation would be 100 per cent of the revenue loss. "It would be paid within the stipulated period of 5 years; it is the central government that has the obligation to pay; only the manner of funding was to be decided by the Council and If there were to be shortage, the required funds could be borrowed," he reminded.

He said that the union government was unable to persuade itself to agree with these submissions and has now offered the two options breaking from a recorded past that has force as good as that of law. In the letter, Badal said that Punjab was now the "highest GST-deficit-state in India".

"Our revenue loss in first option would still remain unpaid even after availing our share of the special window as well as the additional 0.5 per cent of the fiscal deficit," wrote Badal.

"There may be other states on similar footing. Leaving the latter borrowing unprotected by any future revenue stream means the practical impossibility of such a borrowing, besides putting the state into a position of great peril," he stated.

On the second option, Badal said, "There is no rationale for the Centre to charge the cost of borrowings to the states." Notably, Punjab's grim fiscal situation could be gauged from the fact that its own tax revenue collections for the April-June 2020 period had dropped by a whopping 51 per cent, with the GST losses standing at 61 per cent as against the budgetary estimates for this period.

The GST and the VAT (value added tax) collections for the quarter together went down by 54 per cent while the decline in total revenue receipts for April-June period was 21 per cent.

Questioning how compensation would be worked out after January 2021, Badal said, "If projections are made till the end of compensation period (with reasonable assumptions), the total revenue loss may cross 4,50,000 crore. This, together with interest, would require more than 4-5 years to repay the borrowings rather than 2-3 years that is being believed."

Badal stated that many members at the meeting had pointed out that borrowings by states might be costlier anywhere from 50-150 basis points. "When resources for payment have to come from a tax that is levied by the authority of Parliament it makes no sense for states to borrow. States individually have very little role in the finalisation of GST structure or tax rates.

State's future borrowings and repayment capacity will alter based on what decisions are taken by the GSTC where the central government alone has a decisive vote. Any future dispute in relation to GST Compensation will have deleterious impact on the states creating situations of defaults by states, he wrote.

"We thus take both the options with great regret as a clear breach of the solemn and constitutional assurance by the central government. We believe this as a betrayal of the spirit of cooperative federalism that formed the backbone of GST-journey so far," Badal said.

Punjab is prepared to cooperate in a spirit of finding a solution to this vexed problem but is unable to persuade itself to either of the options presented at this stage, he stated.

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