GOI, Don’t Pass the Buck

Context: The recent Goods and Services Tax (GST) Council meeting has quantified potential shortfall in compensation cess and therefore asked the states to borrow to cover this shortfall.

Compensation fund: 

• Under section 8 of the GST Act, states are assured of being compensated for any shortfall in revenue due to transition to the GST regime for a period of first five year, till 2022.
• Compensation cess is to be collected on sin goods such as tobacco and luxury goods such as automobiles.

Arguments for Central Government to take up the responsibility of borrowings:

• The Central government can borrow from RBI and Abroad, which states can’t.
• Disinvestment of PSU available to Centre and not states.
• Profits from Reserve Bank of India (RBI), Central Public Sector Unit (PSU) and Cess are not shared with states.

Problems associated with states’ borrowing:

• Defaults of the state governments: impact the creditworthiness of the ultimate guarantor, i.e. the Government of India

• Also, the interest payment goes to the RBI and ultimately counted as profits of the Centre.

• The shortfall in cess collection due to economic downfall.
• The GST council distinguishes between COVID related and GST related revenue loss, which is irrelevant at these pandemic times.

Way forward:

• Medium-term resource mobilization strategy: which includes continuous multiyear approach and room to include mutual interest burden-sharing fiscal measures.
• Raise Additional Revenue: GST council as per the GST act is authorized to raise additional revenues from the market, which can be repaid by collecting cess after a certain period. 
• Interest-free ways and means window for states, so that RBI does not charge interest from states and bond in perpetuity.