GST compensation: Tamil Nadu rejects Centre’s options

Rejecting both options offered by the Centre for states to make up for the shortfall in the Goods and Services Tax (GST) compensation cess fund, Tamil Nadu government on Monday asked the Union Finance Ministry to raise the required funds as a loan and lend it to GST Compensation Fund against future cess receipts.

In a four-page letter to Prime Minister Narendra Modi, Chief Minister Edappadi K Palaniswami emphasised that the Centre has “moral and legal obligation” to pay the compensation for the shortfall in GST collections. He also recalled that Tamil Nadu agreed to the implementation of GST on the basis of an “unequivocal commitment” that the Centre will compensate states for any revenue loss.

Pointing out that no compensation has been released for the shortfalls in revenue collection since April 1, 2020, Palaniswami said a total of Rs 12,250.50 crores is due to Tamil Nadu as compensation for the shortfall in GST collections, of which Rs 11,459.37 crores has accrued from April to July 2020.

The Chief Minister, whose AIADMK is an ally of the BJP, said both the options suggested by Finance Minister Nirmala Sitharaman during last week’s meeting is “administratively difficult to implement and more expensive.”

“The net impact of the Government of India’s proposed two options is to reduce the overall resources available to States in 2020-21 quite substantially to the extent of about 1 percent of GDP amounting to nearly Rs 2 lakh Crore. This will really hurt spending by States on many crucial COVID 19 and non-COVID 19 related expenditure,” he said.

Welfare programmes and infrastructure creating capital expenditure will suffer greatly, Palaniswami said, adding that this will impede early resumption of growth momentum in the economy and hurt economic revival.

Explaining the rationale behind Tamil Nadu’s concerns over the two options, the Chief Minister said in the first option, only Rs 97,000 crores is assessed to be the shortfall on account of GST implementation alone which is proposed to be borrowed by the state governments with a special dispensation from GOI and RBI.

“For the remainder of the shortfall, which is estimated to be Rs 1.38 lakh crores (Rs 2.35 lakh crores (-) Rs 97,000 crores), States do not get any assurance of receiving funds in 2020-21. They would have to wait for 2-3 years or more, to receive the compensation, out of the cess fund provided GST cess is extended beyond 2021-2022,” he said.

He said while the entire Rs 2.35 lakh crores are to be borrowed by the states, in option 2, the terms of contracting such loans are much less attractive.

“More importantly, borrowing of up to 1 per cent of the GSDP already permitted under the Atma Nirbhar Bharat Scheme is being withdrawn. This makes Option II an unattractive proposition and appears to be aimed at penalizing States for legitimately urging the Government of India to devise a scheme to compensate the States for the shortfall in the current year itself, as per the provisions of the Act,” he said.

Palaniswami also said the reasons being cited for such an arrangement are not persuasive and that the argument that States borrowing for what is essentially a Government of India obligation is a seemingly better optical arrangement does not appear to be a strong or valid reason.

“Hence, I reiterate the Government of Tamil Nadu’s stance that the Government of India should advance funds to the GST Compensation Cess fund if need be by borrowing in the market and service the debt by an extension of the compensation cess,” he wrote in the letter.