New Delhi, With 21 states expressing their preference for the Borrowing Option-1 proposed by the Centre to meet the GST compensation needs of states this year, decks have been cleared for the GST Council to approve the new compensation mechanism and make it universally applicable across all states and Union Territories at its next meeting on October 5.

Finance Ministry sources said that GST Council, as per the GST Act, needs only 20 states to pass any resolution, in case voting is required on any issue. With 21 on board with the first option, this could well be considered for adoption by the Council.

Among the 21 states/UTs opting for first option on GST compensation are: Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh.

Manipur, the only state which had earlier chosen Option-2, later preferred to change it to Option-1.

A few more states are, also, to give their borrowing option in a day or two.

However, states like Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, and West Bengal are yet to respond to the GST Council proposal.

If the other states do not submit their options before the due GST Council meet next month, then they will have to wait till June 2022 to get their compensation dues, subject to the condition that the GST Council extends the cess collection period beyond 2022, the Ministry sources said.

Under the existing GST Act, compensation for shortfall in GST collection, under an agreed formula, is payable by the Centre for the first five years of the operations of new tax system from July 2017 to June 2022.

On August 27, the GST Council, in its 41st meeting, had decided to give its member states two borrowing options to meet their compensation shortfall and a response time of 7 working days from the formal receipt of the detailed proposal on options by email.

Almost 15 states had submitted their options by September 15 and more have joined now.

The first option on GST compensation brought before the Council last month allows states to borrow, under a special dispensation from the RBI, a sum of about Rs 97,000 crore being the shortfall calculated by the Centre that is directly on account of GST implementation.

Under this option, borrowing will not be treated as debt of the state and they would also be permitted to avail full additional borrowing limits given under Aatmanirbhar Bharat package unconditionally. Also, interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period ie June 2022 and subsequently principal and interest will also be paid from proceeds of the cess, by extending the cess beyond the transition period.

The second option given by the Centre allowed states to borrow entire projected GST compensation shortfall of Rs 2,35,000 crore (total shortfall of Rs 3 lakh crore minus Rs 65,000 crore collected as GST compensation cess) for FY21.

But this borrowing will be allowed by subsuming the additional unconditional borrowing limit of 0.5 per cent and the final (bonus) tranche of 0.5 per cent given to states as special limit to fight the Covid pandemic.

Also, the interest on borrowing taken by states under this option will have to be paid by them from their resources. The principal on the amount borrowed under the option, after the transition period, will be paid from proceeds of the cess.

Sources said that the Centre was not in favour of the second option as it would have crowded the market with the state borrowing pushing pressure on the interest rates and bond yields. Also, it would add further debt pressure on states.

The last meeting of the GST Council took place against the backdrop of the opinion of the Attorney General on the compensation cess issue where he has opined that there is no obligation on the Centre under the GST laws to compensate for loss of revenue. It is the GST Council and not the Central government which has to find ways, according to the Attorney General, to meet the compensation shortfall.

Also, a state can borrow, even on the strength of future receipts from the compensation fund, within the parameters of the Articles 292 and 293 of the Constitution wherein the entitlement of a state to borrow is set out in Article 293(1).

The limitation on such right is found in Clause (3), which prohibits a state from raising any loan, without the consent of the Centre, and Clause (2) of Article 292 authorises Parliament to make loans to a state, subject to any limit which may have been fixed by law made by Parliament.

Therefore, after the meeting, the GST Council offered two options to the states to borrow, as the Central government is committed to help the states and has, time and again, stated that the entitlement of the states would always be for full compensation and the entire compensation sum on account of shortfall in collections of GST will be paid and honoured.