Jharkhand joins ‘Option 1’ to bridge GST Compensation Shortfall

Our Bureau New Delhi | Updated on December 05, 2020 Published on December 05, 2020

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Now, all States, 3 UTs are on board

All 28 States and 3 Union Territories (with legislatures) are on board now to go for ‘Option 1’ to meet GST (Goods & Services Tax) compensation shortfall. Last state was Jharkhand, which communicated to Centre about its willingness.

The Goods and Services Tax (Compensation to States) Act, 2017 provides for compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax.

The compensation will be provided to a State for a period of five years from the date on which the State brings its SGST (State Goods & Services Tax) Act into force. For the purpose of calculating the compensation amount in any financial year, the year 2015-16 will be assumed to be the base year, for calculating the revenue to be protected. The growth rate of revenue for a State during the five-year period is assumed be 14 per cent per annum. Growth less than 14 per cent will trigger compensation.

A statement issued by the Finance Ministry on Saturday said the Centre has set up a special borrowing window for the States & Union Territories who choose Option-1 to borrow the amount of shortfall arising out of GST implementation.

The window has been operationalised since October 23, and the Government of India has already borrowed an amount of Rs.30,000 crore on behalf of the States in five instalments. The Centre has passed it on to the States and Union Territories, who chose Option-1. Now, the State of Jharkhand will also receive funds raised through this window starting from the next round of borrowing.


The next instalment of Rs 6,000 crore will be released to the States/UTs on December 7.

Under the terms of Option-1, besides getting the facility of a special window for borrowings to meet the shortfall arising out of GST implementation, the States are also entitled to get unconditional permission to borrow the final instalment of 0.5 per cent of Gross State Domestic Product (GSDP) out of the 2 per cent additional borrowings permitted by the Government of India, under Atma Nirbhar Abhiyaan on May 17.

This is over and above the Special Window of Rs.1.1 lakh crore. On receipt of the choice of Option-1, the Government of India has granted additional borrowing permission of Rs.1,765 crore to Jharkhand (0.5 per cent of its GSDP).

For the current fiscal (FY21), the total compensation shortfall was estimated at Rs 3 lakh crore. Of this, Rs 65, 000 crore was to be met through compensation cess, while a new way was to be looked at for the remaining Rs 2.35 lakh crore. Initially, the Centre said that there will be two options – 1 and 2.



Under 1, proposal was Rs 1.1 lakh crore to be borrowed through Centre’s facilitated special window. The entire debt was to be serviced by collection of compensation cess. Under Option 2, it was said entire Rs 2.35 lakh crore to be borrowed by States from open market. Later, Option-2 was taken away from table.

The Centre, on October 15, unveiled the borrowing mechanism to meet the GST compensation shortfall. Under this, the Rs 1.1-lakh-crore shortfall (assuming all States join in) will be borrowed by the Government of India in tranches, and passed on to the States/UTs as back-to-back loans in lieu of GST Compensation Cess releases.

The amounts will reflect as capital receipts of the State governments and as part of financing of their respective fiscal deficits.

This will also avoid the differential rates of interest that individual States may be charged for their respective SDLs (State Development Loans) and will be an administratively easier arrangement.

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Published on December 05, 2020
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