Karnataka chief minister BS Yediyurappa
Karnataka chief minister BS YediyurappaTwitter

As the non-BJP ruled states intensify fight against the Central Governments' options to fill the gap in GST collections, the saffron party ruled state, Karnataka has agreed to go with option 1 to shore up its finances this fiscal. Option 1 includes borrowing through a special window. As per a report by CNBC, Yediyurappa argued that it would be eligible for Rs 18,289 crore under the Option 1, calling it "more beneficial" for Karnataka.

Calling the option 2 unfeasible, the state government said that the state would not have access to unconditional borrowing of 1% of GSDP, which is estimated at Rs 18,036 crore. This option would also bring down the net borrowing of the state by Rs 10,817 crore. Moreover, the State itself will have to pay the interest on the borrowing under Option 2 from its own resources, which the state does not prefer.

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An Indian consumer goods trader shows letters GST representing 'Goods and Services Tax' (GST)at his shop in HyderabadNOAH SEELAM/AFP/Getty Images

In a press statement, the state government said, "After the evaluation of both the options, it is felt that Option 1 would be more beneficial to the state's finances. Hence, the government of Karnataka has decided to convey to the Government of India its preference for Option 1." It further said, "This would help the state in augmenting its revenue in the present financial year."

What is Option 1 and Option 2 for GST compensation?

Last week the Ministry of Finance had given two options to states to meet their GST compensation requirements. Under Option 1, the government has mooted a special borrowing window from the Reserve Bank of India (RBI) for GST-related compensation. As per the center's measurement, the collective amount stands at Rs 97,000 crore. Under Option 2, the states can borrow a greater sum of Rs 2.35 lakh crore from the market. The latter option also takes into consideration the short arouse due to the COVID related shortfall.

Mamata Banerjee
West Bengal Chief Minister Mamata BanerjeeIANS

Non-BJP states vehemently opposing both options

The development has come amidst the non-BJP states including Kerala, West Bengal, Chattisgarh strongly opposing both options suggested by the central government. In a letter to PM Modi, Bengal CM Mamta Banerjee wrote, "I am deeply anguished by the GST 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." She further went on to add, "This is a travesty and an abrogation of the fundamental basis on which the states gave up 70 percent of their taxing powers, including the entire VAT regime, to usher in the GST regime."