Even as September 8 is the last date for states to opt for one of the options suggested by the GST Council to plug their compensation gaps, finance ministry sources have reiterated that the entire shortfall of compensation to the states -- irrespective of whether it is on account of GST implementation or COVID pandemic -- will be compensated.
Sources in the finance ministry have said: "It has never been the stand of the Union Finance Minister to not compensate the loss of revenue due to COVID-19. The central government has, time and again, committed that the entitlement of the states would always be for full compensation. The entire compensation sum on account of shortfall in collections of Goods and Services Tax (GST) will be paid and honoured."
They, therefore, have denounced the 'narrative' in the media that Centre is reneging on its commitment towards compensating the states.
Finance Ministry sources said that working out revenue shortfall on account of GST implementation is just a mechanism to assess how much of the shortfall should be met by borrowing and how much could be deferred.
Quashing any doubts on the issue, sources in the finance ministry said that if states go for Option 1 and borrow Rs 97,000 crore, it does not mean states will have to forego the remaining compensation, which will be paid to states after the above borrowing has been fully repaid.
They further hinted that the government does not favour the second option under which the states can borrow the entire amount now. Their argument against this is that borrowing for meeting the entire shortfall when the private sector is struggling to stand back on its feet could hurt them badly.
On the allegation that the central government is shirking its responsibility by asking the states to borrow, the finance ministry officials said that under the GST law, the compensation cess is a tax owned by the states and under Article 292 of the Constitution of India, the Centre can borrow on the security of its own taxes and resources which is Consolidated Fund of India. It cannot borrow in the security of the tax which it does not own.
They further argued that if the Centre borrows it would have higher impact on the market and push the G-Sec rate which becomes the benchmark rates for other borrowings including borrowing by the state governments. "Any borrowing by the central government would crowd out borrowings by the private sector and would make borrowings costly for entrepreneurs. The deciding factor would, thus, be whose borrowings will have least impact on the market rates," say the government officials.
The Centre has already enhanced the borrowing limit from 3 per cent, which goes upto 5 per cent of GSDP.
According to finance ministry sources, on an average the states have borrowed so far only about 1.25 per cent of the GSDP. Only a few states have reached around above 2 per cent of the GSDP. Therefore, "enough headroom is available to the states to borrow as per their requirements and needs. In any case, they will get the full compensation shortfall and therefore it is win-win-win for all -- states, center, and economy," said a top official from the Finance Ministry.