GST Compensation: Amit Mitra Says States Have No Headroom To Take On Any New Debt

A day after the central government asked states to borrow more to make up for the shortfall in goods and services tax revenue, West Bengal Finance Minister Amit Mitra said they have no headroom to take on any new debt.

“I take the debt, it comes into my books. I cannot take debt. I have no headroom. Some states are not able to pay salaries. On top of that, you take debt that you have to service?” Mitra said in an interview with BloombergQuint's Sanjay Pugalia on Rajpath.

Union Finance Minister Nirmala Sitharaman, after the 41st GST Council meeting on Thursday, proposed two options to states to resolve the issue of compensation cess shortfall under the GST regime. This shortfall has been estimated at Rs 2.35 lakh crore in 2020-21. Of this, the central government said only Rs 97,000 crore is on account of GST implementation, while the rest is due to Covid-19 and not provided for under the GST Constitutional Amendment. In the first option, the states can borrow the Rs 97,000 crore from the Reserve Bank of India via a special window. The alternative allows states to borrow the full shortfall of Rs 2.35 lakh crore from the market.

“Of the two options presented, we may produce a third or a fourth option. But the principle remains that there is no headroom to borrow or pay interest and so they (centre) must kindly come along and keep their commitment,” Mitra said. “We will study the fine print of the options presented to us with an open mind under the condition that we don't have to take any debt and we don't have to service it at least for a period of time, maybe for a year.”

Sitharaman, according to Mitra, in the 39th GST Council meeting had said the central government was responsible to make up for the shortfall in GST revenue to the states. States gave up 70% of their taxing power when GST was introduced, with the guarantee that they will be compensated at a 14% annual increase by the central government for five years, he said.

The central government has the capacity to borrow at a lower rate and service debt as it can print money from the Reserve Bank of India to monetise its fiscal deficit, Mitra said, adding the hope is that the finance minister will consider the view of all states and the federalist policy will be preserved.

“It will be a big shock to India if the federalist policy falls apart where state after state, irrespective of political party, finds that they are not able to manage because the GST compensation money is not paid,” Mitra said.

Three states, including Karnataka, ruled by the Bharatiya Janata Party, too, voiced similar concerns. The GST Council will meet again after seven working days to deliberate upon states' responses.

Watch the full interview here: