States ruled by the opposition will seek the Prime Minister’s intervention on the issue of compensation for goods and services tax to the states. Participant states are unhappy with the offer of two lending options provided to them. Andhra Pradesh, Tamil Nadu, and Odisha are likely to join Delhi, Punjab, Kerala, West Bengal, Chhattisgarh, Jharkhand, Maharashtra, Rajasthan, and Puducherry to meet the with the PM. The states are trying to avoid rejecting the provided options of borrowing from the RBI. They are hopeful of chalking out a strategy where they can get their dues without having taken any new debt.

Finance minister of Kerala, Dr. T.M. Thomas Isaac had stated in a media briefing that the states have decided against the idea of borrowing. He further added that at least a dozen chief ministers would write personally to the PM regarding the clearance of the dues to owed by the center to the states. Andhra Pradesh, Tamil Nadu, and Odisha have created a strong position in the council of the states opposing the proposals of borrowing put forth by the center. We hope they will also join it. The states are discussing the ‘state finance scenario’ with the Finance secretary and the expenditure secretary One of the options presented by the central government on last Thursday was allowing states to take a loan of Rs 97,000 crore from the facility of a special central bank, including repayment of the principal and interest for compensation cess. This was in the context of a changed GST regime.

The other option offered was to borrow Rs 2.35 lakh crore, a projected shortfall due to GST transition from the market and Covid-19 induced slowdown, facilitated by the Centre and RBI. In this case, the states would have to bear the burden of interest, while the principal would be served by the indemnity cess imposed on specified categories of sins and luxury products such as cigarettes and automobiles. Kerala’s Finance minister also added that it was necessary to take a loan from the market and it is administratively difficult to implement and more expensive. He further stated that the reasons cited by the center for such an arrangement could not be accepted. Chief Minister of Chhattisgarh Bhupesh Baghel had stressed that the central finance minister has to make arrangements to pay the remaining Rs 2,828 crore in the state.

The state of Punjab sought clarity on several matters, including the opinion of Attorney General KK Venugopal on the compensation cess provided to the states based on insufficient information.

The reduction in compensation without amendments to the GST Compensation Act had been questioned by many states including Punjab. Clarity was sought by the Finance minister of Punjab, Manpreet Singh Badal on the calculation of compensation for the period after January 2021, especially since it is still not clear when the impact of Covid-19 would end. He also stressed on the question that on what basis the losses due to GST implementation were calculated; a 10% increase over the previous year and the remainder attributed to the Covid-19 pandemic.

The GST Act and the center’s suggestions to allow states to take loans are legally contrary to each other. Technically and legally all the resources are first deposited in the Consolidated Fund of India and then disbursed to the States. This argument was put forth by many states, most prominently by Punjab. Many state-level officials also questioned the logic of calling the GST dues as compensation. They have also observed that it goes against the core desired outcomes of the GST regime. Coercing the states to take loans for their dues goes against the argument of fiscal federalism.