May 31, 2023

GST Compensation Bonds Should Be Floated

By Sunil Garodia
First publised on 2020-10-06 11:30:33

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Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

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The GST Council meeting on Monday, October 5, was stormy as expected. But the sad part is that the current compensation dispute was not resolved. Instead, opposition ruled states alleged that when they raised the matter and demanded answers, finance secretary A B Pandey ended the meeting abruptly.

For the record, it was decided that compensation cess, through which the government had promised to pay the states for any shortfall in tax revenue for five years till 2022, will continue beyond that date to help the states recover their back dues due to the uncertain economic conditions.

The Centre also decided to release Rs 20000 crore immediately as the first tranche of compensation for the current year. It will also release another Rs 25000 crore next week to states that received less than their share of integrated GST in FY 2018. This will obviously provide some relief to some states as their finances are strained due to the pandemic.

Although one can understand that the pandemic has made things difficult for the Centre as funds have dried up due to low tax collections because of the slowdown in the economy and the lockdown which brought economic activities to a standstill, one still feels that as the head of the federal family, it is the duty of the Centre to find ways to get the money to compensate the states. The Centre has many more options than states to raise money.

Ideally, if GST collection is about Rs 1.25 lakh crore every month, all states will get their current dues cleared within a few months. But the collections are hovering between Rs 90000 and Rs 95000 crore, with no substantial improvement in sight. At this rate, there will continue to be a shortfall of Rs 30000 crore every month. Together with the current shortfall, it will add up to a huge amount in the next few months and is likely to bring development funding to a standstill in many states. The Centre must find a way out, and soon.

Extraordinary (act of God) situations need extraordinary solutions. A special shortfall recovery mechanism, say a three-year GST Compensation Bond bearing an interest rate of 4 percent (slightly more than the reverse repo rate at which banks are parking their excess funds with the RBI) can be floated. Banks should be made to invest in these funds. The states should be compensated with the proceeds. The bonds should be redeemed from the collections of the GST compensation cess. Ideally, 33 percent of the bonds should be redeemed every year to reduce the interest burden. If banks have to be provided liquidity earlier, 15 percent can be redeemed every 6 months. This will ensure that neither the Centre nor the states will be unduly stressed for funds and banks will get more than what they are now getting by parking funds with the RBI