GST compensation: Union govt gives in, to borrow Rs 1.1 lakh crore to meet shortfall

The borrowing, a statement by the Finance Ministry said, "will not have any impact on the fiscal deficit of the Government of India".
Nirmala Sitharaman
Nirmala Sitharaman
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The central government will borrow up to Rs 1.10 lakh crore on behalf of the states to bridge the shortfall in GST collections, the finance ministry said on Thursday.

A slowdown in the economy since last fiscal has resulted in a drop in the Goods and Services Tax (GST) collections, upsetting the budgets of states which had given up their right to levy local taxes such as sales tax or VAT when GST was introduced in July 2017. To make up for the shortfall, borrowing from the market was proposed.

In a statement, the Union finance ministry said states were offered a special window to borrow Rs 1.10 lakh crore over and above their existing limits, to bridge the shortfall. "Under the special window, the estimated shortfall of Rs 1.10 lakh crore (assuming all states join) will be borrowed by Government of India in appropriate tranches," the statement said.

"The amount so borrowed will be passed on to the states as a back-to-back loan in lieu of GST compensation cess releases," it added. Borrowing by the Government of India will ensure uniformity in yield and spacing of bond auction, a senior finance ministry official said.

However, principal and interest payments will be done from the compensation pool. Mobilisation of Rs 1.10 lakh crore funds will be done through issuance of bonds having tenure of three to four years, the official added.

The central government borrowing on behalf of the states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.

The borrowing, the statement said, "will not have any impact on the fiscal deficit of the Government of India".

"The amounts will be reflected as the capital receipts of the state governments and as part of the financing of its respective fiscal deficits," it said.

It may also be clarified that the general government (States+Centre) borrowings will not increase by this step, it said.

"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% of GSDP (from 3% to 5%) under the Aatmanirbhar Package," the statement said.

According to market sources, since different states were getting varying rates for borrowing for meeting GST compensation shortfall, they approached the Centre for arranging it at a uniform rate.

When the GST was introduced in July 2017, states were promised a 14% incremental revenue over their last tax receipts in the first five years of the GST rollout. This was to be done through a levy of a cess or surcharge on luxury and sin goods, but the collections on this count have fallen short with the slowdown in the economy since last fiscal.

To make up for the shortfall, the Centre suggested that the states can borrow against future compensation receipts. 

Earlier this week, the finance ministry had stated that 21 states have accepted one of the two borrowing options suggested by the Centre. The borrowing options, however, were not acceptable to non-BJP-ruled states.

Interest on the borrowed amount would be the first charge on the cess, which gets collected beyond the five years. The next charge would be 50% towards the principal amount which gets borrowed, that is Rs 1.10 lakh crore, and then the remaining 50% would be towards compensation impacted by the coronavirus pandemic.

Under the terms of Option-1, besides getting the facility of a special window for borrowings to meet the revenue shortfall, states are also entitled to get unconditional permission to borrow the final instalment of 0.50% of GSDP out of the 2% additional borrowings permitted by the Government of India under the Aatmanirbhar Abhiyaan on May 17, 2020.

Earlier this week, the Centre permitted 21 states opting for Option-1 to together borrow an additional of Rs 78,452 crore through open market.

The borrowing permission issued to the 21 states is over and above the borrowing permission of around Rs 1.10 lakh crore to be issued to enable states to meet the revenue shortfall arising out of GST implementation, the statement said. A special window is being created by the finance ministry to facilitate this borrowing, it added. 

The current additional borrowing permission has been granted at the rate of 0.50% of the Gross State Domestic Product (GSDP) to those states which have opted for Option-1 out of the two options suggested by the finance ministry.

Under GST structure, taxes are levied under 5, 12, 18 and 28% slabs. On top of the highest tax slab, a cess is levied on luxury, sin and demerit goods and the proceeds from the same are used to compensate states for any revenue loss.

The surcharge on cars and other luxury goods and tobacco products varies from 12% to 200% on top of the highest GST rate of 28%. It was due to expire in June 2022.

This has now been extended beyond 2022.

The payment of GST compensation to states became an issue after revenues from the imposition of cess started dwindling since August 2019.

The Centre had to dip into the excess cess amount collected during 2017-18 and 2018-19. The Centre had released over Rs 1.65 lakh crore in 2019-20 as GST compensation. However, the amount of cess collected during the 2019-20 stood at Rs 95,444 crore. The compensation payout amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18.

During April-July of the current fiscal, the total compensation due to states stood at over Rs 1.51 lakh crore.

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