GST compensation: Centre to borrow ₹1.1 lakh crore to meet shortfall

The central government will borrow ₹1.1 lakh crore under the special window to meet the shortfall of Goods and Services Tax (GST) compensation, the finance ministry informed on Thursday. 

“Under the Special Window to States for meeting the GST compensation cess shortfall, the estimated shortfall of ₹1.1 lakh crore (assuming all states join) will be borrowed by Government of India in appropriate tranches,” the finance ministry said.

The amount borrowed will be passed on to the states as “back-to-back loan in lieu of GST compensation cess” releases, said the finance ministry. This borrowing will not have any impact on the fiscal deficit of the government. The amount will be reflected as the capital receipts of the state governments and as part of financing of its respective fiscal deficits, said the finance ministry. The Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.

The general government (states + centre) borrowings will not increase because of this, as the states that get the benefit from the special window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2 percent of gross state domestic product (from 3 percent to 5 percent) under the Aatma Nirbhar Package, the statement said.

“The Centre has sticked to its ground and borrowing in its name is only for operational convenience and it should not be construed as the Centre yielding to the states,” Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors LLP said.

“There has to be an appropriate balance between borrowing by either Centre or state and extension of the compensation cess to compensate the loss of revenue to the states,” said Abhishek A Rastogi, partner at Khaitan & Co.

The total shortfall in collection of GST estimated at ₹2.35 lakh crore. Out of the total shortfall, ₹1.1 lakh crore is on account of GST shortfall.

During the meeting in August, the Centre presented two options before states to meet the GST shortfall. The two options before states were — 1) A special window can be provided to the states, in consultation with the Reserve Bank of India, at a reasonable interest rate for borrowing of ₹1.1 lakh crore. The amount can be repaid after five years (of GST implementation) ending 2022 from cess collection. The GST panel had increased the borrowing limit of ₹1.1 lakh crore instead of ₹97,000 crore on Monday. 2) The second option is to borrow the entire ₹2.35 lakh crore shortfall under the special window.

The government will provide a further relaxation of 0.5% in states’ borrowing limit under FRBM Act as second leg of the first option, said finance minister.

At least 21 states have already been granted permission to borrow ₹78,542 crore without any condition on reforms. These states including Tamil Nadu, Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Sikkim, Tripura, Uttar Pradesh and Uttarakhand.

The states like West Bengal, Punjab, Kerala and Delhi have not yet accepted the borrowing option given by the Centre. “Some of the States are likely to approach SC against discriminatory and illegal action of Centre regarding GST Compensation. Kerala CM to chair a meeting of law, tax and finance departments and advocate general to take final decision on Kerala’s stance tomorrow afternoon,” Kerala finance minister Thomas Isaac earlier said in a tweet.

“The dissenting states have indicated to knock the doors of the judiciary and legal battle is set to take place. The attorney general’s opinion would be tested in the courts now,” said Vijayasarathy.

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