Kelkar: Centre needs to borrow and make up for states’ GST losses

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The central government has no other go, but to borrow from the market and make up for states’ Goods and Services Tax (GST) losses even though this obligation is “overly generous” in the present circumstance, said Vijay Kelkar, former finance secretary and chairman of the 13th finance commission.

Kelkar, who had advised the Centre to bring in the GST back in 2004, said in a paper sent to Union Finance Minister Nirmala Sitharaman that the current proposal before the Centre and states of letting the GST Council, a Constitutional body with the union and state ministers as members, to borrow for the purpose appear to be “anomalous” as such borrowing would require a corporate identity which would weaken the federal tax body’s authority.

A corporate identity is not a desirable thing for the Council in view of the litigation involving GST, Kelkar said in the paper, co-authored with V Bhaskar, a senior fellow at Pune International Centre (PIC), a research body. Mint has seen a copy of the paper due for publication by PIC.

Kelkar argued in the paper that even if the Council is allowed to borrow, it may need to be guaranteed by the Centre, which will vicariously make it a Central borrowing. Hence, the only option is to let the Centre borrow and bridge any gap in the GST cess that is used for compensating states. “Maybe reluctantly, but ineluctably, the Centre must recognize that there is no other option till the cess expires in 2022,” said the authors.

The paper also argued that the Narendra Modi administration should promptly respond to demands from states to pay them overdue compensation cess by borrowing from the market. “Though it does not appear to be legally liable, it ( the Central government) has a moral imperative to do so, even if the guaranteed rate of (state) revenue of 14% is inordinately high in the present Covid-19 led economic downturn,” the authors argued.

The GST Council is scheduled to meet in July to exclusively discuss ways of raising resources including by market borrowing to compensate states. The central government had agreed to meet any shortfall in states’ GST revenue from a 14% annual growth over the base year of 2015-16 as part of a deal to win states’ consent for the difficult indirect tax reform.

The paper also argues that the Centre should leverage this opportunity to ensure states accept reforms which could include the inclusion of petroleum products in the GST base, setting a road map for including electricity duty and real estate into the GST base, and simplifying GST rates with fewer exemptions.

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