India’s government has failed to pay states the compensation it promised for supporting a nationwide tax reform, setting the stage for a showdown between Prime Minister Narendra Modi’s administration and the provinces.
The dispute is over 3 trillion rupees ($41 billion) that Modi’s government owes states this year, because the account from which the funds are disbursed is short by about 2.35 trillion rupees. For now, the federal administration is encouraging states to borrow the shortfall amount, promising to resume payments as tax revenue improves when the economy fully reopens from the coronavirus-induced lockdowns.
Some states ruled by opposition parties have rejected this offer and have threatened action including urging the courts to intervene.
“The law says that if there’s a dispute in the council a dispute resolution mechanism will have to be put in place,” saidManpreet Singh Badal, finance minister of the northern Indian state of Punjab and a member of the Goods and Services Tax Council that administers the indirect tax rates. “If need be, we would go to Supreme Court. But we will exhaust this option of approaching the Parliament first.”
The dispute comes at a critical time for India’s economy, which posted the biggest contraction among major economies last quarter, and can crimp public expenditure — further delaying a recovery. India’s 29 states rely on fundtransfers from the federal government to pay salaries, subsidies, and infrastructure creation after they gave up the bulk of their tax-making powers to allow the introduction of GST in 2017.
Badal said Punjab has already deferred capital expenditure because of the delays — which was described as “act of sovereign default” by Hemant Soren, the chief minister of Jharkhand state. Thomas Isaac, the finance minister of the southern Indian state of Kerala, said the federal government should borrow to compensate the states.
FMs of Punjab, Delhi, W Bengal, Chhattisgarh,Telengana and Kerala agreed to reject the Centre’s options on GST compensation .Our option: Central Govt to borrow entire compensation due regardless of acts of gods, humans or nature , to be paid back by extending the period of Cess.3:23 PM · Aug 31, 2020
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