Faltering Cooperative Federalism - No consensus in GST Council - Can the GST Council stop a State from borrowing?
OCTOBER 14, 2020
By Vijay Kumar
TO borrow or not to borrow - that was the question; if yes, who should borrow?; If States borrow, who will repay?; who will pay the interest?; is borrowing within the jurisdiction of the GST Council?; Is the Centre bound to pay the Compensation? Which is better - Option 1 or 2? These and similar such questions went far away from the cooperative federalism and could not be resolved, let alone unanimously in the just concluded GST Council meeting. The fait accompli at the end of the day after was that 20 States were allowed to borrow an amount of Rs.68,825 crore.
Facilities available to the States who chose Option-1 include:
a. A special borrowing window, coordinated by the Ministry of Finance to borrow the amount of shortfall in revenue through issue of debt. The total shortfall in the revenue of the States on this account has been estimated at around Rs 1.1 lakh crore.
b. Permission to borrow the final instalment of 0.5% of GSDP out of the 2% additional borrowings permitted by the Government of India in view of the COVID pandemic, waiving the reforms condition.
So, 20 States have agreed for borrowing and are being helped by the Centre to borrow. What about the other States who have not borrowed this idea? Are they left in the lurch? No, they can also join the scheme, when they understand that they have no option. What about Option-2? Well, what is that option? It is no more live. So, there is unanimity, you have no option and are forced to choose Option-1 as there is no other option.
But what is the role of the GST Council? Do you need the GST Council to let the States to borrow? Can anyone stop the States from borrowing if they want to? The Council Chairperson also had similar doubts.
The Council meeting started on a pleasant note, with Finance Minister after Finance Minister of the States congratulating and thanking the Union Finance Minister for the stimulus package. Of course, Kerala Finance Minister Thomas Isaac tweeted, "An example of fiscally prudent stimulus policy of Central Govt : Rs. 12000 cr 50 year interest free additional loan to states. Kerala is entitled Rs. 200 cr. Some stimulus indeed!"
He was equally agitated about the way things are going as he tweeted,
Union FM's announcement that she is going to permit 21 states to borrow as per Option one is illegal. Option one involves deferment of compensation payment beyond 5 years for which a Council decision is necessary as per AG's opinion. No such decision has been made in the Council.
It is unfortunate that Union FM does not propose a decision in the Council or even make a statement what she is going to do but choose to make the announcement in the press conference. Why does Centre refuse to take a decision in Council? Total disregard for democratic norms.
Punjab Finance Minister Manpreet Singh Badal was more caustic. He said,
We are thus close to setting up some dangerous precedents: Goodbye to Constitution. Goodbye to compensation law. Goodbye to minutes of the council meetings. Goodbye to AG's opinion.
Good and bad times come and go for citizens as well as nations. Laws are primarily meant to ensure the correct course of conduct even when there are temptations to deviate from chartered path. As far as Punjab is concerned, our issue is simple. Give us compensation as per law. If a pragmatic change is necessary, get the law amended.
Unless Centre borrows and credits it to compensation fund, it is not compensation.
Some members suggested that those willing may be allowed to go ahead to borrow leaving others to fend for themselves. Is this what Constitution and Compensation Act imagined?
Strong feelings indeed. So were the ones of Madam Nirmala Sitharaman.
She said,
This GST council is a body that represents very high authority - a very respected federal institution.
As regards the shortfall, the collection of Cess is inadequate to pay the compensation.
Shortfall has to be met by borrowing. And the Centre cannot borrow. Can the Council stop any state from borrowing? Is it the like the UN Security Council where somebody can veto?
There was no consensus arrived. GST Council can take a call on cess, collection, extension and so on, but can GST Council order that States should not borrow?
There is no dispute; there was differences. There is unanimity that compensation has to be paid and it will be paid.
In the quest for unanimity, do we wait for consensus, when many states need money urgently and are ready to borrow?
All other options are out now.
And what if some States would go to the Supreme Court? She refused to answer that question.
Back to the beginning: It all started with the brilliant idea that this One Nation should have one Tax and in a great act of political and economic alchemy, we created the GST as a model for the world to follow as an example of cooperative federalism at its best. But there was money involved and the States agreed to surrender their sovereign power to tax, only on the solemn statutory promise that they would be assured of a 14% growth in tax collection and in the event of the unlikely happening of that 14% becoming elusive, the Centre would compensate. Where would the Centre compensate from? They came up with the more brilliant idea that the Centre can collect a cess and distribute it to the States. All was well when the Cess so collected was more than sufficient to compensate the States. But all hell broke loose when we ran short of money and the Centre, who is the custodian of minting, looked up to the Attorney General, rather than the RBI Governor for a solution, on payment to the States, as the Centre was itself finding it difficult to pay dearness allowance to its poor employees (who are now being tempted to spend money with assured GST payment - that's a scheme which works like - you pay Leave Travel Concession to the employees and ask them to use that money to buy something so that they pay GST and that GST will fill the coffers. The lowest paid Central Government employee gets about 30000 rupees and if he doesn't spend with the sole purpose of paying GST to the government, who else will?).
So, the Centre cannot pay compensation to the States; so, borrowing is the only option and the centre cannot borrow; it can only help the States to borrow. So, we follow the marathon meetings of the GST Council, only to hear the conclusion of the Central Finance Minister that GST Council is nobody to tell any State to borrow or not borrow. Who says there is no unanimity, no consensus - if you agree with the Centre?
Cooperative federalism is all about obeying the centre or being left.
Let the Centre give us Money
Speaking in the Constituent Assembly on 20th August 1947, Mr. K. Santhanam said,
The provinces will be beggars at the door of the Centre.
What is happening in the United States? Both the Centre and the States can levy all kinds of tax. They can levy Income Tax. There is nothing to prevent them except the popular will. There, the Ministers or the Governor can go to the people and say "we have got powers of taxation; pay the taxes and we will give you entertainments, circuses, and whatever you want". Instead of that, here, they will have to say "we shall give you entertainment; let the Centre give us money".
Ghastly Savageous Tax
This has now become a Ghastly Savageous Tax and it is time we repair it immediately. This is the best time to do it. We should make it a gracious and sagacious tax. Start with throwing away all those complicated compliance requirements and the mountains of statutes. Let there be one tax, one law, one authority, one return and unlimited peace for all concerned - really concerned.
Until next week
