COVID-19 impact | GST consensus under threat over compensation to states

Some states, including Kerala, have been demanding that the Centre borrow from the market to pay dues to states. They contend that the borrowings can be repeated by extending the cess imposition on items like automobiles and tobacco beyond 2022, when these levies expire.

Bihar Deputy Chief Minister Sushil Kumar Modi, in an interview to Mint said that states need to be realistic about their compensation demands as the Centre is also facing revenue losses. Modi said the Centre can compensate states only from the revenue collected in the compensation cess fund, not from the Consolidated Fund of India.

“As per the law, compensation to states is to be given from the compensation cess fund," Modi said, adding that measures like increasing tax rates and extending the coverage of the GST cess cannot be taken up soon owing to the coronavirus crisis.

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Kerala Finance Minister Thomas Isaac in December 2019 had told the council that it could borrow to fund the compensation requirement and extend the levy of cess from five to six years.

A failure to reach a consensus on the issue may undermine Centre-state relations. According to experts, "borrowing is the only option."

Former finance secretary and chairman of the 13th finance commission Vijay Kelkar said, "Centre has no other way but to borrow from the market and make up for states' GST losses even though this obligation is overly generous."

"In the current year, GST compensation can be frontloaded to aid states," said NR Bhanumurthy, Vice-Chancellor of Dr BR Ambedkar School of Economics in Bengaluru.

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