As the Goods and Services Tax (GST) Council could not reach a consensus on borrowing options in lieu of compensation cess shortfall, Finance Minister Nirmala Sitharaman said that some states questioned whether the Council has any authority to disallow those states that have already opted for one of the borrowing options from going ahead with their borrowing plans.

"There was no consensus arrived on a matter on which differences exist. The GST Council can certainly take a call on cess, collection of cess, extending the period of collecting the cess and so on. That was repeatedly reiterated," Sitharaman said. The minister said that among members there was a question on whether the GST Council can order that either the Centre borrow or states borrow.  "Every state has a business to do what it wants about its own borrowing. GST Council has been gracious enough in unanimously agreeing to extend cess beyond 5 years," Sitharaman said.

FM also said that since Article 293 of the Constitution gave states the freedom to borrow, the 21 states that have agreed to avail the option of the Rs 1.1 lakh crore borrowing window, can go ahead and do so.

The minister said that the collection of cess is inadequate for paying compensation which is apparent for everyone to see, and because it is something which was never envisaged, the shortfall will be now be met by borrowing.

Sitharaman said that states sought clarifications on why the Centre cannot borrow on behalf of states and the government provided an explanation for the same. She said that the Centre has already issued the borrowing calendar for this fiscal and going beyond the calendar would immediately jack up the bond yields. "The g-sec yield will go up and if this went up then the borrowing cost will increase." Increased borrowing costs are not something that the government can afford at a time when India is looking at more money to invest and to borrow to do business, Sitharaman said. "The impact would not be as severe if states were to borrow," she said.

She also assured that states borrowing would not mean a chaotic situation, as the Centre would facilitate states, so that some states don't end up paying high-interest rates while others obtain loans at a reasonable rate. "We are open to all states who wants us to facilitate any loan. A lot of people have chosen Option 1. We are ready to deal with it," Sitharaman said.

States had also asked some specific clarifications, which were given to them. Many clarifications were sought on the Attorney General's opinion on borrowing, and the GST Council's authority to extend cess collection beyond 5 years. In August, the Centre had proposed two options to states, to either borrow Rs 97,000 crore (on account of GST implementation) through a special window facilitated by the RBI or to borrow the complete shortfall of Rs 2.35 lakh crore (including Rs 1.38 lakh crore due to COVID) from the market.

The amounts under the two options have since been revised to Rs 1.10 lakh crore and Rs 1.8 lakh crore, respectively.