GOI, Don’t Pass the Buck

The Economic Times     31st August 2020     Save    
QEP Pocket Notes

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.
QEP Pocket Notes