GST impasse ends: Statesmanship by force or a new beginning?

Also read: FM Nirmala Sitharaman writes to states explaining GST borrowing plan

2. The second and equally important decision taken on Thursday is that an additional 0.5 percent of their SGDP ( state gross domestic product) that states were allowed to borrow to bridge COVID related shortfalls, will now come without any conditions. Earlier, the same permission was granted with conditions such as implementing power sector reforms and the one-nation-one-ration card scheme.

The Centre could have and should have agreed to both these points from the start. By early August, it became clear that the GST shortfall would be over Rs 2 lakh crore. On August 28, the Centre came with the argument that COVID-19 is an "Act of God" and the Centre is not bound to make good the entire GST shortfall. It then pulled out an assumption of a 10 percent nominal GDP growth, on which the 14 percent GST CAGR was based, and proceeded to argue that part of the shortfall which was due to the GDP contraction will not be liable to be compensated and only that part of the shortfall which was due to the implementation of GST, will be compensated. The Centre pressed this argument for nearly two months. The most important statement in the finance minister's letter to the state governments yesterday was the complete about-turn in this position.

Also read: GST compensation shortfall: Chidambaram welcomes Centre's change in stance on borrowing

It admitted that as per the Attorney General, the entire shortfall will have to be paid to states. The letter said the government has accepted this legal position. It would have been way more efficient, graceful and statesmanlike to have accepted this on August 15, instead of on October 15. Right now, it appears to be statesmanship by force. The threat of the state of Kerala to drag the central government to court, and possible defeat in the apex court, appears to have scared the central government into accepting the legal position that states have to be paid the full compensation of 14 percent CAGR of sales taxes, as agreed in section 7 of the GST Act.

Section 7 of the GST Act is key. Under the GST Amendment Act, states agreed to hand over their most lucrative tax source - sales tax - to the GST Council, provided they are compensated for the first five years at a compounded annual rate of 14 percent. To introduce, in the face of COVID-19, a caveat out of thin air, that the 14 percent was contingent upon the economy growing at a nominal GDP of 10 percent was unfair on the part of the Centre and legally untenable.

The other decision announced in this letter that states can borrow an incremental 0.5 percent of their SGDP without conditions is equally important. In August, the Centre quoted section 292 of the constitution to say that any extra borrowing by states can come only with the Centre's permission and the Centre has the right to impose conditions. This was clearly a high-handed interpretation of the constitution. The constitution requires a state to seek Centre's permission to borrow from the market, only if it has taken loans from the Centre. This is more in the nature of a borrower taking a NOC (No Objection Certificate) from his bank before he takes another loan from another bank. It was unethical for the Centre to impose conditions like power reforms and ration cards. Now wiser counsel appears to have prevailed and the conditions have been set aside.

Also read: CAG slams Centre over GST cess disbursal; Rs 47,272 cr compensation due to states transferred to central fund

So what caused this change of heart. Besides the threat of legal defeat in the court, maybe it was a growing realisation that being on a warpath with the states defeats the Centre's own reform agenda. The three farm reform bills, can't really be implemented without states' cooperation. The sight of India's most productive farmers, marching daily against bills that are supposed to benefit them, shows that the Centre is distrusted not only by states, but also by farmers. The farmers’ anger is now turning against big business houses, whom they see as the beneficiaries of the so-called farm reforms. It is one thing for the Centre to be called suit-bookt-ki sarkar by Rahul Gandhi, Arvind Kejriwal, and Mamata Bannerjee and quite another to be so ridiculed by a mass farmer movement. Maybe all these factors together caused the climb down on the part of the Centre.

While it certainly looks like co-operative federalism by force, than by choice, one still hopes this spirit of cooperation continues. The current COVID-driven adversity essentially requires delivering services at the grassroots, be it collecting land records for the PM Kisan Yojana, or implementing the Rural Employment Guarantee Scheme or the proposed Urban Works Program. Even more, co-operation will be needed if when the vaccine arrived. The Centre would be well advised to soften its big brotherliness with a little more friendly neighbour attitude.