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Referring to the Covid pandemic as an ‘Act of God’ that will result in a contraction of the economy in the current fiscal, Finance Minister Nirmala Sitharaman said that in the 41st meeting of the Goods and Services Tax (GST) Council Thursday, states were presented with two options to resolve the contentious issue of compensation shortfall estimated to be Rs 2.35 lakh crore.

State finance ministers, who in the meeting insisted on the borrowing to be done by the Centre to make up for revenue shortfall, later said there was lack of clarity regarding the proposals that were brought towards the end of the five-hour meeting. They also termed the move to make a distinction in the revenue shortfall on account of GST implementation and the pandemic as “unconstitutional”.

The first option for states includes a special window to be provided, in consultation with the RBI, for borrowing the projected GST shortfall of Rs 97,000 crore and an amount that can be repaid after five years of GST implementation ending 2022 from the compensation cess fund.


The second option is to borrow the entire projected shortfall of Rs 2.35 lakh crore — both on account of faltering GST collections and the expected shortfall due to the pandemic — under a special borrowing window facilitated by the RBI.

The states have been given a week’s time to get back with their views.

Referring to the distinction between genuine GST compensation and compensation because of Covid, Kerala Finance Minister Thomas Isaac said: “They are enforcing a cut in compensation and bringing in an unconstitutional distinction… There were serious differences of opinion, I challenged the distinctions. I am willing to consider borrowing by states but full compensation must be paid,” he told The Indian Express.

Isaac said the states’ FRBM limit should be raised at least by 1.5 percentage points if the entire Rs 2.35 lakh crore has to be borrowed. “We will not accept any option if the states are not compensated. The entire borrowing must be accommodated with an increase in the borrowing limit,” he said.

During the meeting, which began with discussions on the legal opinion on borrowing and the compensation fund, most state ministers pressed for borrowing by the Centre to bridge the revenue gap. “All states wanted the Centre to borrow, except Assam, Goa. BJP-ruled states put it mildly, other states put it vociferously. Then, the Centre came with this proposition where states have to make the sacrifice, which is not acceptable,” another state finance minister said.

“Why should we differentiate between pre-Covid and post-Covid? The discussions went on about compensation and the fund, and these options were presented at the end of the meeting,” Punjab Finance Minister Manpreet Singh Badal said, adding that the borrowing would translate into “mortgaging of the future to live for the present”.

However, BJP leader and Bihar Deputy Chief Minister Sushil Kumar Modi welcomed the options. “Both the proposals are welcome… states will not be burdened as interest and principal will be paid from the cess fund. States wanted that borrowing by the Centre would be better, but now even if states have to borrow, there will be no burden on the exchequer. They don’t have to do repayment or interest payment and hence, state exchequer won’t get burdened,” he said.

According to Sitharaman, the borrowing would be under a special dispensation to be facilitated by the central government at G-sec linked rates.

The Union Finance Minister said the Rs 97,000 crore option comes with the additional incentive of 0.5 per cent relaxation in FRBM for states in the current fiscal. This, she said, would be freed from conditions announced earlier as part of the pandemic package linked to the implementation of reform measures such as universalisation of ‘One Nation One Rationcard’, ease of doing business, power distribution and augmentation of urban local body revenues.

The cess collected after June 2022, which is the end of the compensation period as specified in GST-related laws, would be used for interest payment.

There was some lack of clarity regarding the differentiating features of the two options, with many states not aware of the pros and cons, and details regarding the FRBM clause. No details were released by the Finance Ministry.

After the meeting, Finance Secretary Ajay Bhushan Pandey said that in the absence of the pandemic, revenue shortfall due to implementation of GST alone would be Rs 97,000 crore considering the gap between states’ protected revenue growth of 14 per cent year-on-year and GST mop-up growth in a normal year at a 10 per cent nominal GDP growth.

He said that Rs 2.35 lakh crore is the expected shortfall in states’ entitlement due largely to the pandemic-induced economic slowdown and GST implementation issues. The gap between protected revenue and states’ GST earning this fiscal is expected to be Rs 3 lakh crore, a part of which would be met with Rs 65,000 crore of estimated cess collection, leaving a gap of Rs 2.35 lakh crore at the end of the year.

“One of the options for bridging the gap given by the Attorney General was to extend the compensation cess levy beyond five years to meet the shortfall suffered during this five year-period between July 2017 and June 2022,” Pandey said.

Even if states choose the first option, their compensation entitlement for the next year would be protected but paid from the cess collected after the five years of GST have lapsed. The borrowing plan is valid for this year only and the Council would review the revenue position next fiscal to decide on payment.

“We shall facilitate talking to the reserve bank and getting it at a G-sec linked (proportionate number of years) rate for all states so that each state doesn’t have to go running for the loan and face different situations,” Sitharaman said.

She said the Centre will facilitate the process so that all states can avail loans at roughly the same interest rate.

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