Centre proposes 2 borrowing options before States to meet GST compensation shortfall

The cess that you pay on automobiles, aerated drinks and tobacco products will be around beyond June 30, 2022, when it is supposed to end. This is a direct fallout of the solution suggested at Thursday’s the GST Council meeting, which discussed the imbroglio between the Centre and the States over the issue of compensation cess.

Briefing the media after chairing a five-hour GST Council meeting, Finance Minister Nirmala Sitharaman said that the fall in GST collections is due to an ‘act of God’ and that States have been offered two options to borrow and make good the shortfall. The Centre will stand guarantee for these borrowings and part of it could be counted under the additional 0.5 per cent of Gross State Domestic Product borrowing under the FRBM Act.

“The Centre will work with the RBI to facilitate borrowing so that the interest rate does not vary,” she said. The Centre also made a distinction between revenue lost due to the implementation of GST and the slowdown arising out of the Covid-19 crisis. It said its legal obligation was only to compensate States for losses arising out of the GST rollout.

Proposal details

Giving details about the two options, Finance Secretary Ajay B Pandey said that of the ₹2.35-lakh-crore compensation shortfall, only ₹97,000 crore relates to GST implementation, in other words the normal shortfall due to rate cuts or lower returns filed. The balance is due to the effect of Covid. So, under the first option, States can borrow just the ₹97,000 crore and retain their compensation entitlement, while under the second option, they can borrow the entire ₹2.35-lakh crore and repay the sum using the cess collected during the transition period. In both the options, the repayment of principal and interest will be linked to the compensation cess receivable. This means cess could be levied beyond five years.

Under the first option, there will be a special window by the RBI. Under the second, the RBI will facilitate borrowing through the open market.

States have to come back with their views within seven days, and the final decision will be taken by the GST Council.

Call for Central borrowing

Bihar’s Deputy CM Sushil Kumar Modi said either option will help the States resolve their fiscal problems. He did acknowledge that an additional 0.5 per cent relaxation under the FRBM will cover the first option easily but not the second. However, the Congress said it favoured the Centre borrowing for the States.

According to government data, for April-July 2020, the total GST compensation to be paid is ₹1.5-lakh crore. The total compensation requirement for this fiscal is estimated at ₹3-lakh crore, of which ₹65,000 crore is expected to be collected through cess and the balance is the shortfall. Compensation is provided through cess levied on some products under the 28 per cent GST rate category.

“Considering the current scenario of the economy, the States might be left with no other option but to request the Council to consider increasing the cess or including more products or extending the levy of cess by some more years. Approaching the RBI instead of the market to avoid making the interest yield dearer to the States seems logical,” said Divakar Vijayasarathy, founder and Managing Partner, DVS Advisors LLP.

The two options

For ₹97,000 crore: Related to GST implementation; RBI will open a special window for this

For ₹2.35-lakh crore: Entire shortfall; RBI will facilitate borrowing through the open market

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