The Union government’s decision to borrow Rs 1.10 lakh crores and end the impasse over the payment of compensation to state governments for the shortfall in the collection of Goods and Services Tax (GST) is welcome. The borrowing will be effected under a special window and the money will be passed to the states as back-to-back loans and will not impact the fiscal deficit targets of either governments. The Centre will service the loan and then repay it from the GST compensation cess, which will be extended beyond the scheduled term of 2022.
The GST Council was unable to find a way out of the dispute on how to bridge the estimated shortfall of Rs 2.35 lakh crores in the GST collection for this fiscal. The Centre had suggested that the states borrow Rs 1.10 lakh crores, which it said was the share of the shortfall due to the implementation of the unified tax system, though it was mandated to bridge it as per the GST (Compensation to States) Act 2017. Union finance minister Nirmala Sitharaman’s attempt to wash her hands off it, blaming it as an “act of God” did not help the matter either.
That the change in stance will ensure better rates and easy administration of the process is only part of the deal. More noteworthy is the political victory of the states, ruled mostly by Opposition parties, who refused to play ball and asked the Centre to see reason; they had even contemplated moving the Supreme Court. The pandemic has affected both the Centre and the states and it would have been graceful on the part of the former to have made this announcement earlier. Still, better late than never. The Centre should now take a similar magnanimous approach and help the states bridge the shortfall of Rs 1.25 lakh crores lost due to the pandemic and let the spirit of federalism thrive.