KCR fires at Centre on GST, asks to borrow on behalf of States

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modi-kcr file photo

Chief Minister Chandrasekhar Rao has demanded the centre to reverse its decision of asking states to meet the shortfall in the compensation through borrowings.

In a letter addressed to the Prime Minister Narendra Modi here today, CM KCR expressed his concern over the modalities suggested by the Centre to meet the shortfall in the GST compensation payable to the state. He said Government of Telangana fully supported the introduction of GST knowing very well that it would result in a loss of revenue in the short term, keeping in view of the national interest. Our expectation was that there would be long term gains and more investments following the introduction of GST. 

But to our utter shock, Telangana which had been deprived of Rs 3800 Crore on account of Revenue loss by CST was further made to offset its losses of Rs 8000 crore incurred during the covid lockdown through borrowings. He further alleged that as per the GST Compensation Act, full compensation for the loss of revenue shall be paid on a bi-monthly basis. Despite such a statutory mandate, there have been long delays in the payment of compensation, and the states have not been paid GST compensation since April 2020, he said. 

It may be recalled, the Finance Minister T Harish Rao also while expressing his resentment over the Centre’s decision on GST alleged that it has planned to avoid paying Rs1.35 crore out of Rs 3 Lakh Crore to the states. He also declared that the state would oppose the move as it would result in the loss of Rs 25,000 crore.

Here is the letter written by the Cheif Minister:

The then UPA Government assured the states on payment of full compensation arising out of the abolition of CST. However, the states were denied CST compensation and Telangana State was deprived of Rs 3800 Cr on account of Revenue loss by CST. Due to this bitter experience, on the insistence of states, it is clearly stipulated in GST Compensation Act, that full compensation for the loss of revenue, on account of implementation of GST, shall be paid that to on a bi-monthly basis. Despite such a statutory mandate, there have been long delays in the payment of compensation, and the states have not been paid GST compensation since April 2020. 

While the state’s revenue collections have significantly declined their expenditure commitments have increased. In April 2020 we suffered a revenue loss of 83% whereas Covid-19 pandemic related expenditure has increased. We are faced with the difficult task of meeting the expenditure through front-loading of market borrowings, taking resort to ways and means advances and overdrafts. With broad fiscal policy being controlled by the Government of India, States are made to depend on the Union Government even to go for market borrowings. Prescribed 3.5% FD for Gol whereas states are restricted to 3% in against the federal spirit to the constitution. 

The argument put forth that the additional borrowings by the Centre influences yields on Central government securities and has other macroeconomic repercussions is not very convincing. The borrowings by the Centre as well as the States are from the same financial system and pool of investors and their impact on the macro-economic situation is not very different. Borrowings by the States will also push up the yields on government securities. 

It also a matter of grave concern to States that the Centre has taken a unilateral decision to apply 10 per cent growth to arrive at the gap in GST revenue for the year 2020-21. Further, an artificial distinction is being made between the loss of revenue on account of GST implementation and the impact of Covid. Such a distinction is not provided for in the Act. Thus statutory provisions for GST compensation has no meaning, if Gol does it honour it is litter spirit. 

I would earnestly request you to reconsider the decision allowing the States to borrow to the extent of shortfall in the compensation payout by the Centre for the following irrefutable reasons. 

  1. The States have yielded more fiscal space to facilitate the introduction of GST. GST has subsumed over 47 per cent of the gross tax revenue of the States as compared to only 31 per cent of the Centre. With the introduction of GST, States are left with no major buoyant taxes of their own, while the Centre is still left with buoyant sources like income tax, corporation tax and customs duties. In addition, the Centre has access to more non-tax revenues such as dividends from the RBI, Central Public Sector Undertakings, etc. Thus the Centre is endowed with more resources to help the States. In a situation such as Covid pandemic, the Centre instead of extending a helping hand is denying the States, their legally rightful claims. The options given to the States to borrow, to meet the shortfall in compensation cess, are not in accordance with the Act. Linking these options to additional borrowings allowed under Aatmanirbhar package is only to deny the states the full benefit of the package.
  2. The expectation of the States that with the introduction of GST, the share of cesses and surcharges, which are not shareable with States, will come down has been totally belied. The Centre has resorted to levy of cesses on imported goods and increased the cess on petrol and diesel by Rs. 13 per litre. The estimated additional revenue from the increase in the cess on petroleum products alone is over Rs. 2 lakh crore per annum. This has pre-empted the States from increasing the VAT on petroleum products.
  3. As mentioned earlier, States are at the forefront of fighting Covid and reviving the stalled economic activities. They need more resources than the Centre. 
  4. The Centre is abdicating its responsibility of fully compensating States by taking recourse to the legal opinion. The Centre has violated the provisions of the GST Compensation Act by parking the surpluses in the Compensation Fund in its Consolidated Fund instead of parking them in the non-lapsable Compensation Fund in the Public Account and using the surpluses for meeting its expenditure in the years 2017-18 and 2018-19. Now that there is a deficit, States are being asked to borrow

Taking into account the compelling reasons mentioned above, it is my earnest request that the decision of asking the States to meet the shortfall in the compensation through borrowings may be reversed. As an alternative, the Centre can borrow the entire shortfall amount based on the strength of the receipts into Cess amount. The entire debt servicing – both principal and interest can be paid from the cess collected for such an extended period, beyond 2022, as the GST council may decide. 

Finally, I would urge that there is an imperative to strengthen cooperative federalism in this crisis situation so that we can not only overcome it but emerge as a strong nation. Development in any corner of the country or in any state will contribute to national development. Strong states make the nation strong. So far, all the decisions by the GST Council have been taken unanimously. I think we need to maintain this tradition in future too. 

I am confident you will certainly take on board my concerns and look at the alternative proposed in a positive manner. 

Your’s Sincerely

K Chandrasekhar Rao

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