Kerala CM rejects Centre's options on GST compensation, cites fear of financial stress

On Monday, Kerala CM Pinarayi Vijayan wrote a letter to Prime Minister Narendra Modi regarding the hurdle in payment of GST compensation to the states. He requested the PM to ensure that the two borrowing options sent by the Finance Ministry are withdrawn. According to Vijayan, this was not in accordance with the spirit of understanding reached between the Centre and the states during the discussions preceding the constitutional amendment for bringing in the GST.

He recalled that the states were assured of an annual compounded growth rate of 14% in GST revenue with 2015-16 as the base year during the initial 5 years of implementation. Observing that this provision was incorporated in the GST (Compensation to States) Act, 2017, Vijayan noted that the GST compensation would be released at the end of every two month period. He alleged that this was not being adhered to since 2019-20, with states receiving no compensation from April 2020.

Read: Mamata Banerjee Writes To PM Modi; Expresses 'anguish Over GST Imbroglio'

Read: GST Revenue At Rs 86,449 Crore In August, Down 12% From Same Month Last Year

In his letter, the Kerala CM revealed that Rs.7000 crore is due to the state from April to August. While acknowledging the Centre's argument that the loss in revenue is unprecedented due to the COVID-19 crisis, he noted that expenditure pressures have been much larger for states. Vijayan contended that this artificial distinction drawn could exacerbate the severe financial stress of states. He reiterated that the promised GST compensation was an important reason for the states to accept uniform rates for the supply of goods and services. Moreover, he urged the Union government to follow the letter and spirit of the GST (Compensation to States) Act, 2017. 

Read: Consider More Legally Viable Options For Providing GST Dues To States: Kejriwal To PM Modi

Centre's two options

Earlier, the Finance Ministry had rejected the demand of multiple states and proposed two options on meeting the shortfall in GST compensation. First, it suggested that states could borrow Rs.97,000 crore (the revenue shortfall arising on account of GST implementation and not taking into account COVID-19) with the entire principal and interest repayment of the debt to be met through cess collection in subsequent years. Furthermore, the states have been allowed to borrow an additional 0.5% points under the FRBM Act. However, if the states opt to borrow the entire amount of Rs.2.35 lakh crore, only the principal amount shall be repaid from the cess. In such a scenario, the states will have to bear the interest burden. 

Read: Chhattisgarh CM Writes To FM Sitharaman Opposing Centre's Options For GST Compensation