- One significant area of loss of revenue to both the Centre and the states is GST.
- But “while the states have the comfort of assured 14 per cent growth through the compensation mechanism, the Centre has no such guarantee”.
- The Compensation Act mandates compensating the states for revenue loss on GST implementation from the Compensation Fund.
- Jaitley had said that
- “in case the amount in the GST Compensation Fund fell short of the compensation payable,
- The GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years”.
- Additional resources could be raised by increasing the tax or the cess but in the present difficult times
- it would not be advisable to raise the burden of either the tax or the cess; if anything, it is the time to mitigate the burden on the common man.
- Hence, the only way out of this difficult situation is borrowings.
The question is: Who should borrow — the Centre or the states?
- It would be “financially imprudent for the Centre to borrow since large borrowings by the Centre would push up the bond yield rates,
- Which in turn would push up the bond yield of the states setting off a spiral leading to hike in the interest rates for businesses and individuals.
- The states’ borrowing would become costlier if the Centre were to borrow for this purpose”.
- So, the states should come forward and work with the Centre in the true spirit of cooperative federalism that the Council has come to be known for these past few years.