States should not be made to bear the burden of borrowing: Punjab FM Manpreet Badal

The burden of borrowing from markets to make up for the deficit in goods and services (GST) compensation due from the Centre cannot be solely on states, Punjab finance minister Manpreet Badal said in a letter to Union finance minister Nirmala Sitharaman.
“States should not be made to bear the burden of borrowing, which in any case is likely to be higher than the rate at which the central government will be able to borrow,” Badal said in the letter dated July 3, a copy of which was seen by ET.

Badal suggested a combination of borrowing and bringing more products such as tobacco and cigarettes, and other goods used predominantly by the rich, under the ambit of compensation cess to overcome the deficit.

“In federal polity there shall always be some dispute on legal interpretations… Constitution allows their healthy resolution through a mechanism that is yet to be operationalised,” said Badal.

The Punjab finance minister’s comments came close on the heels of the attorney general’s opinion that the GST Council can decide on raising funds from the market for compensating states, in case of revenue shortfall. ET had reported that the council can ask states to raise funds on their own.

The GST compensation law says the council has to decide on making good the shortfall in the compensation fund by providing for sufficient amounts to be credited to it.

Compensation to states has to be paid over a five-year transition period for any potential loss in revenue due to implementation of the tax, which was rolled out on July 1, 2017.

The amount is to be paid from the GST Compensation Fund via a cess imposed on certain items.

The Centre has met the entire liability for the past three years, based on an assumed growth of 14% with 2015-16 as the base year. For 2019-20, the Centre has paid 1.65 lakh crore as compensation to states. However, due to the impact of Covid-19 on the tax revenue, it may not be able to meet the requisite levels of compensation to states, the government told a parliamentary panel.

“The specific rates for compensation cess may be considered for revision to factor inflation,” Badal suggested in the letter to Sitharaman, adding that the cess did not capture the buoyancy on products whose prices have increased. Further, he said the central excise duty on cigarettes and tobacco products in the previous Budget boosted the Centre’s collections but compromised the cess, and suggested that this should be subsumed into compensation cess. Restoring the pending integrated GST for 2017-18 can also help meet the shortfall, he said.