GST set to meet, Sushil Modi says Centre morally bound to pay states

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Bihar Deputy Chief Minister and Finance Minister Sushil Kumar Modi said on Tuesday that the Centre should borrow and pay GST compensation to states even if it is not legally bound to do so. “But the Centre is morally bound to do so”, Modi said ahead of the GST Council meeting on August 27.

“State finances are under stress. We are able to pay only salaries, wages and pensions. We are heavily dependent on the Centre as 76 percent of our revenue comes from the Centre…,” Modi said at an online Idea Exchange of The Indian Express.

“States should get GST compensation. We will raise the matter during the upcoming meeting. States cannot borrow. It is the Centre that should borrow. It is the moral responsibility of the Centre to help the states. If states cannot get support from the Centre in these times of difficulty, it would be difficult for the states,” Modi said.

The Bihar Deputy CM heads the ministerial panels on Integrated GST (IGST) settlement, IT challenges in the implementation of GST, and analysis of revenue from GST. The panels on IGST and IT met recently.

Thursday’s meeting of the GST Council has the single-point agenda of compensation to states for losses of revenue under the indirect tax regime. Compensation payments to states are pending for the four months of this financial year April, May, June, and July.

The option of exploring market borrowing to bridge the compensation deficit was discussed in earlier meetings as well, and it was decided to seek legal opinion from the Attorney General of India. However, the A-G is learnt to have put the ball squarely in the Centre’s court, stating that the central government does not have an obligation to pay for the revenue shortfall, and that the Council can recommend to the Centre to allow states “to borrow on the strength of the future receipts from the compensation fund”. The A-G’s opinion left it to the Centre to take the “final decision in the matter”.

Several states have voiced concern over the borrowing proposal, saying the compensation fund is unlikely to have enough funds to cover for the borrowing by states. Some of them have instead suggested raising tax rates, and bringing more items into the ambit of compensation cess to shore up revenues.

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