Two days after the Goods and Services Tax (GST) Council meeting, the Centre Saturday detailed the borrowing options proposed to states for meeting this year’s compensation shortfall of Rs 2.35 lakh crore under the indirect tax regime.
Option 1 has a special window for states, coordinated by the Finance Ministry, to borrow the projected shortfall of Rs 97,000 crore only on account of GST implementation — and not the Covid-19 pandemic — and this amount can be fully repaid from the compensation cess fund, without being counted as states’ debt.
Option 2 takes into account the impact of the pandemic, proposing states to borrow the entire Rs 2.35 lakh crore and bearing the interest burden though principal will be repaid from the cess proceeds. The GST shortfall amount (Rs 97,000 crore) will not be counted as states’ debt, while the rest of the amount of Rs 1.38 lakh crore will be counted in the books of the states.
Explained | What are the issues in GST compensation?
Finance Secretary and Expenditure Secretary will hold a meeting with state finance secretaries on Tuesday to clarify issues regarding these two borrowing options.
The sharing of interest burden in the second option has been modified from what was announced Thursday. Finance Secretary Ajay Bhushan Pandey had then said, “So far as the repayment of loans is concerned in both the options, it will be made through the cess collected in the 6th year, 7th year or whatever time it takes to repay the entire loan. Of course, the interest also will be paid through the cess mechanism. In no case will the states be burdened.”
The Centre has, however, clarified its legal stance on the distinction in revenue shortfall on account of GST implementation and COVID-19 pandemic, a point which was earlier termed by several states as unconstitutional.
“Compensation is payable for the entire shortfall (even if it is not on account of GST implementation). This position has been clarified by the Attorney General and is accepted by the Central Government,” the statement said.
The Centre also said that the “Indian economy, nay the global economy, is suffering from an exogenous shock” this year, which has impacted the economic activity and hence, the revenues. “Parliament obviously could not have contemplated a historically unprecedented situation of huge losses of revenue from the base—arising from an Act of God quite independently of GST implementation—affecting both Central and State revenues, direct and indirect,” it said.
It further said that Central expenditures are “stretched not only by the pandemic response but also by the needs of national security”. It added: “This is a national problem not a Central Government problem alone.”
The Centre stated that the compensation is to be paid only from the Compensation Fund and it is not its obligation in case of a shortfall. It also cited discussions in the Council and a proposed legal amendment to consider payments out of the Consolidated Fund of India (CFI) for meeting the revenue shortfall, stating that those were voted against and negated.
“It is for the GST Council to decide on the mode of making good the shortfall. To the extent the shortfall is not made good, the states would still be eligible to get it in arrears after the transition period through extension of the cess, if so decided by the Council,” the statement said.
Though Option 2 takes into account the impact of the pandemic as separate from that of GST implementation, a senior government official said it is not making any distinction. “The entitlement remains the same. Only thing is how much borrowing is prudent,” the official said, adding that this may tilt states towards Option 1.
For the special borrowing window under Option 1, the Department of Economic Affairs is in consultations with the Reserve Bank of India for fixing the modalities, the official said. “The borrowing will technically be of the states. But since repayment is from the cess fund, something can be worked out,” the official said.
Under Option 1, states will also be able to carry forward — to the next fiscal — the unutilised borrowing space of 1 per cent of GSDP unconditionally that was earlier announced as part of the Covid-19 package.
The states can also carry forward the balance 1 per cent of their limit but that will continue to be linked to the implementation of reform measures such as universalisation of ‘One Nation One Ration Card’, ease of doing business, power distribution, and augmentation of urban local body revenues.
In Option 2, states have not been given the space to carry forward their reform-linked borrowing limit. States’ borrowing ceiling would be re-calculated based on basic eligibility and shortfall, implying reduction in maximum borrowing limit announced under the pandemic package to 1 per cent of GSDP from 2 per cent of GSDP at present.
For Option 1, the Centre said it would bear the margin between government securities (G-secs) and average of the State Development Loan yields up to 0.5 per cent through a subsidy, if cost of borrowing is higher than G-sec yield.
In May, the Centre had raised the net borrowing limit for state governments from 3 per cent of the gross state domestic product (GSDP) to 5 per cent but only 0.5 percentage point of the extra borrowing window was unconditional.
One percentage point after that was to be made available in four equal tranches and the balance 0.5 percentage point could be accessed if milestones are “completely achieved” in at least three out of four reform measures.
GST compensation payments to states have been hanging fire since April, with the pending amount for April-July estimated at Rs 1.5 lakh crore. The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while cess collection is expected to be around Rs 70,000 crore – an estimated compensation shortfall of Rs 2.3 lakh crore.
Under The GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22). The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualised 14 per cent growth rate from the base year of 2015-16. The high rate of 14 per cent, which has compounded since 2015-16, has been seen as delinked from economic realities given that nominal GDP growth rate has slowed to a much lower level.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines