West Bengal Chief Minister Mamata Banerjee on Wednesday wrote to Prime Minister Narendra Modi and said the denial of Goods and Services Tax compensation to the states was as an “insufferable blow to federalist policy of our nation”, PTI reported. The chief minister joined the demand by other non-BJP ruled states that the Centre should borrow to meet the compensation deficit.

In a letter, Banerjee criticised Attorney General KK Venugopal’s legal opinion that it was not the responsibility of the Centre to compensate the states for GST shortfall. She said this “appears to be an act of subterfuge”.

On August 27, Finance Minister Nirmala Sitharaman at the GST Council meeting had said that the crisis facing the states is an unforeseen “act of God”, referring to the coronavirus pandemic. The Centre offered two options for borrowing by states to meet the shortfall. As per its estimates, the states’ GST revenue gap in 2020-’21 will amount to about Rs 3 lakh crore, while cess collections are only projected to reach Rs 65,000 crore, leaving a shortfall of Rs 2.35 lakh crore.

The first option is to provide a special borrowing window to states, in consultation with the Reserve Bank of India, to provide Rs 97,000 crore at a reasonable interest rate. The other option is to meet the entire GST compensation gap of Rs 2.35 lakh crore this year itself after consulting the central bank.

The West Bengal chief minister said these are “unilateral options”, both of which require the states to borrow lakhs and crores of rupees.

“I am deeply anguished by the Goods and Services Tax imbroglio which tantamounts to a betrayal of the trust and moral responsibility of the Government of India towards the states, violating the very premise of federalism,” Banerjee said in the four-page letter. “This is a travesty and an abrogation of the fundamental basis on which the states gave up 70% of their taxing powers, including the entire VAT regime, to usher in the GST regime. On behalf of Bengal and other states, I sincerely urge you not to belie the trust between the States and the Centre on matters of GST which has been hailed globally as the finest example of cooperative federalism.”

The chief minister said the Centre is duty-bound to give compensation to the states. “The Centre must borrow to meet the shortfall at this critical hour of the Covid-19 pandemic and I am sure that the States will reciprocate in supporting a resolution that Cess collection continues beyond the five years till the entire debt of the Centre is totally liquidated, along with the entire interest payment cost,” she added. “Furthermore, Government of India can raise the resources to service its debt, while the states simply cannot service huge additional debts when their finances are on the verge of collapse.”

The Kerala and Chhattisgarh government have asked the Centre to take loan and clear dues. Delhi Chief Minister Arvind Kejriwal on Tuesday wrote to Prime Minister Narendra Modi to consider more “legally viable and sustainable” options for providing compensation to states amid the financial crisis. He had also suggested that the GST Council should consider authorising the Centre to borrow on its behalf and extend the period of collection of cess beyond 2022. Similarly, Puducherry Chief Minister has also said the Central government was bound to compensate the states for loss of revenue.

Karnataka opts for first option

Meanwhile, BJP-ruled Karnataka on Wednesday said it has decided to go with the first option given by the Centre. The decision was taken after Chief Minister BS Yediyurappa, who also holds the finance portfolio, held discussions with officials.

“After the evaluation of both these options, it is felt that option 1 would be more beneficial to the state’s finances,” an official statement from the chief minister’s office said. “Hence, the government of Karnataka has decided to convey to the government of India, its preference for option 1.”

The chief minister said that with this option Karnataka would be eligible for total compensation of Rs 18,289 crore, of which Rs 6,965 crore would come from the cess collected. For the balance of Rs 11,324 crore, the state would be able to borrow through a special window with the entire burden of principal and interest repayment being met out of compensation cess fund in the future, the statement said.

Also read: With the Centre refusing to pay compensation to states, is GST nearing an end?