India in stalemate on borrowing to help out pandemic-hit states

Spending to help India`s pandemic-hit economy is likely to face delays after the federal government and some states on Monday failed to agree who should borrow to cover revenue shortfalls.

India`s Goods and Services Tax Council, comprising federal and state finance ministers, last week extended a surcharge on luxury goods including cars and tobacco products beyond 2022 to help states repay loans raised to fill revenue gaps in the current fiscal year.

While 21 states, mainly ruled by Prime Minister Narendra Modi`s party and its allies have agreed to borrow from the market, around 10 which are run by opposition parties insist that the federal government should borrow and compensate them.

Under the 2017 national goods and services tax (GST), the federal government was mandated to compensate states until 2022 if their revenue growth fell below 14% a year.

But states now facing a tax shortfall of about 3 trillion rupees ($41 billion) in the financial year ending in March as a result of the coronavirus crisis, are only likely to get about 650 billion rupees from the federal government.

"There was no unanimity among the members of the GST council on borrowing," Nirmala Sitharaman told a news briefing.

Some states said they will take the dispute to the Supreme Court, blaming the federal government for violating the accord.

Sitharaman said the government will proceed with the states who have agreed to borrow, but declined to comment on how the dispute with the others would be resolved.

Rajat Bose, a partner at Shardul Amarchand Mangaldas, a law firm specialising in tax matters, said the stalemate was likely to continue.

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"The only certainty is that the levy of cess (surcharge) will continue beyond 2022 which means that eventually its the consumers who will be funding the shortfall," he said.