Tamil Nadu CM Edappadi Palaniswamy writes to Modi to pay GST compensation

After Kerela, Tamil Nadu too has rejected the Union Government’s suggestion to borrow GST shortfall from the market. In a letter written to Prime Minister , Tamil Nadu Chief Minister Edappadi Palaniswamy has asked the centre to pay the GST compensation to the states by raising the required funds as a loan by itself. 

Earlier Kerela finance minister Thomas Isaac said that Kerela will reject the Centre’s proposal of borrowing by states to meet the GST revenue shortfall. The opposition ruled states are at loggerheads over financing of the Rs 2.35 lakh crore Goods and Services Tax (GST) shortfall in the current fiscal 2020-21. These opposition states include Punjab, Kerela Delhi, and West Bengal. 

Tamil Nadu is the first ‘politically friendly’ state to have lodged its concern with the Prime Minister. Tweeting his letter to PM Modi said that so far, no compensation has been released for the shortfalls in revenue collection since April 1, 2020. 

The government of India had given unequivocal commitment to compensate the states for any revenue loss under the 101st Constitution Amendment Act and in the GST (Compensation to States) Act, 2017. 

In the letter to Prime Minister on Monday, he asked the Centre not to reduce the permitted additional borrowings by the States by 2 percent of the State GDP under the Atma Nirbhar Bharat stimulus package. In the letter, Mr. Palaniswamy insisted that the Centre’s suggestion made in the recent GST Council meeting, for the States to borrow from the market to make good the shortfall in the compensation, is administratively difficult and more expensive. He mentioned that the suggestion for the States to borrow for what is essentially the Centre’s obligation does not appear to be a strong or valid reason.

Of the total 2.35 lakh, crore GST shortfall about Rs 97000 crore is on account of GST implementation and the rest is Rs 1.38 lakh crore impact of COVID on states’revenue. 

In the last GST Council meeting, the central government gave two options to the state to extend the compensation cess levied on luxury, demerit, and sin goods beyond 2022 or borrow from a special window facilitated by the Reserve Bank of India or from the Market. 

During April-July of the current fiscal, the total compensation requirement of states stands at Rs 1.50 lakh crore. Total GST collection during April-July was Rs 2,72,642 crore, which is 65 percent of what was collected in the same period last year.

The payment of GST compensation to states became an issue after revenues from the imposition of cess started dwindling since August 2019. The Centre had to dive into the excess cess amount collected during 2017-18 and 2018-19.

The Centre had released over Rs 1.65 lakh crore in 2019-20 as GST compensation. However, the amount of cess collected during 2019-20 was Rs 95,444 crore. The balance Rs 69,556 crore was paid from the excess cess collected in 2017-18 and 2018-19.

The compensation payout amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18.

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