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Center unlikely to give ground on GST compensation

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NEW DELHI: The government is unlikely to give in to demands to change the goods and services tax (GST) offset formula despite opposition-ruled states requiring the Center to borrow from the market and transfer funds to cover the deficit between real collections and the promised growth of 14%.
Senior government officials told TOI that the compensation mechanism and calculations of what it should be have been “integrated” into the law and that the proposals presented to the states were based on two rounds of consultations with Attorney General KK Venugopal .
“It is absolutely clear that the funds must come from the cess and 14% is calculated on a base year of 2015-16 for all states. This is the basis on which the figure of Rs 97,000 million has been arrived at assuming a nominal growth of 10%, ”explained a government source.
The Finance Ministry has considered possible options for the past two months since Finance Minister Nirmala Sitharaman assured states that there will be a GST Council meeting just to address the compensation issue.
She has been a part of meetings that may generally involve only officials at a stage where options are studied before presenting them to the minister, sources told TOI. It was felt that it should provide the necessary guidance on a matter that is of central importance to the finances of the Center and the states.
The opposition-ruled states are demanding that the Center bear the burden and is expected to file its protest over the two options shared by the Finance Ministry on Saturday.
But the Center came to the view that borrowing from the market would result in higher rates overall as bond yields tightened, a position that was clearly articulated in communications from the Ministry of Finance to the states. Saturday. If interest rates on government securities rose, the cost of borrowing by states would also increase. Furthermore, borrowing costs for the private sector will also increase.
Furthermore, Center officials argued that by opening a special window to allow states to borrow up to Rs 97,000 crore, the Center was offering a good rate as well as cushioning the impact on the market.
The formula that the Center developed was very precise, sources said. The compensation was calculated with a nominal growth of 10% (inflation of 4%). The loss caused by this drastically reduced estimate is equivalent to Rs 97 billion.
The deficit beyond this is the impact of the Covid-91 force majeure situation or as Sitharaman called it “an act of God.” Therefore, the terms for financing this part of Rs 2.35 lakh crore will be different, officials said.
It is also pointed out that the Center itself has to bear an expense and, consequently, a deficit higher than previously estimated. In the case, it would not be financially sound for the Center and, in terms of impact, even for the states.

Times of India

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