GST shortfall: Punjab, Bengal, others to choose Option 1, Kerala demurs

The opposition to the Centre’s formula for bridging the states’ estimated, large goods and services tax (GST) shortfall in FY21 seems to be withering away. Following Maharashtra, Tamil Nadu and Delhi, Punjab is learnt to have decided to accept the Option 1 proposed by the Centre in this regard.

Another staunch critic of the both the options mooted by the Centre – West Bengal – has remained conspicuously silent on the matter, ever since an extended session of the 42nd GST Council meeting held last Monday.

More states are expected to convey their decision to adopt Option 1 to the Centre in the coming days.

What has changed the mood among the dissenting states – now not more than 5-6 – is the Centre’s decision to borrow under the proposed special window and its assurance that along with additional unconditional open market borrowing (OMB), a total of Rs 2.16 lakh crore will be available to states in FY21. This amount is more than enough to address any cash flow problem that states could have faced due to GST shortfall in the year.

Punjab had earlier formally rejected both options given by the Centre to make up for the shortfall. The state’s finance minister Manpreet Singh Badal reportedly wrote to Union finance minister Nirmala Sitharaman that, “We take both options with great regret as a clear breach of solemn and constitutional assurance by the central government”. Of course, then the states were supposed to borrow under the special RBI-facilitated window, under an assurance that the cost of borrowing via this facility will be comparable to similar duration G-sec rates.

The states that are yet to convey their stand officially to the GST Council are Jharkhand, Kerala, Punjab, Rajasthan, Telangana, West Bengal and Chhatisgarh.

In a letter written to state finance ministers last week, Sitharaman wrote: “A total of Rs 2.16 lakh crore is unconditionally available to states under Option 1 (special window + 0.5% extra OMB sans reforms). This more than covers the funds which would have been received by them during the current financial year if total compensation were paid in full”.

Under the borrowing Option 1, the Centre had put the upper limit of combined borrowing by all states at `1.1 lakh crore. The amount is related entirely to losses due to implementation of GST while it is estimated that total shortfall, which includes impact due to pandemic, would be Rs 2.35 lakh crore for the current fiscal. Sitharaman noted that against the total estimated shortfall of Rs 2.35 lakh crore, some Rs 1.83 lakh would have been payable this year under normal course, and the rest only next year. So, the Rs 2.16 lakh crore available under the two tools would more than suffice to address the shortfall issue.

However, the mechanism might still involve a cost to the states. Under GST Compensation Act, 2017, the states are guaranteed a 14% annual growth in the relevant tax revenues over five years till July 2022, meaning such tax receipts would be their income sans any cost. While the interest cost on the special window is going to be covered by the GST compensation cess, the servicing cost of the additional unconditional open market borrowing (OBM) of 0.5% of GSDP may have to be borne by the states.

Kerala, therefore, still wants the Centre to borrow the entire GST compensation shortfall of Rs 1.83 lakh crore, which includes Rs 1.1 lakh crore on account of GST implementation and Rs 73,000 crore due to Covid-19. “Higher borrowing will not affect the Centre’s fiscal deficit. Fears of crowding out private investment is misplaced in recession,” Kerala finance minister Thomas Isaac tweeted on Monday.

Already, the gross state development loan issuance expanded by a substantial 56.8% to Rs 3.53 lakh crore in H1FY21 from Rs 2.25 lakh crore in H1FY20. The net SDL issuance rose by an even higher 91.4% on year in H1FY21 to Rs 3.02 lakh crore.

The extra OMB space accorded to the 21 states and 2 UTs which have so far chosen Option 1 amounts to Rs 78,542 crore.

The states/UTs that have chosen Option 1 for GST compensation are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Sikkim, Tripura, Uttar Pradesh, Uttarakhand, Tamil Nadu, Delhi and Jammu & Kashmir.