GST Council meeting: Centre places two borrowing options for states to meet GST revenue shortfall

NEW DELHI: The Centre offered two borrowing options to states to make up for the shortfall in the goods and services tax (GST) compensation cess fund, including a special window to directly raise finances from the Reserve Bank of India (RBI). The proposals were made at Thursday’s GST Council meeting and will be discussed at the next one in September.

States can either borrow the full compensation deficit of Rs 2.35 lakh crore, which includes revenue loss due to transition to GST and also the Covid-led slowdown, from the markets, facilitated by the Centre and the RBI, or the shortfall that’s purely due to GST implementation of Rs 97,000 crore via the RBI special window. It was, however, not clear if both options will be available or the GST Council will go with just the one acceptable to most states.

The states will revert on these plans in seven working days to the council, which will meet again next month.

“If each state rushes to the market, it will harden bond yields, so we thought it sensible to approach the Reserve Bank of India to help us and facilitate the process, whereby all states could possibly get loan at the same rate,” said union finance minister Nirmala Sitharaman.


States Won’t be Burdened: FM
She referred to Covid-19 as an “act of God” that could lead to contraction in the economy in the current fiscal. "In no case will the states be burdened," Sitharaman told reporters after a GST Council meeting of more than five hours.

Some of the opposition-ruled states voiced their dissatisfaction at the options offered by the Centre.

“A decision has been imposed on us. Our stand was the Centre should pay one third of this deficit out of its consolidated fund and the next two-thirds the states can borrow, in the sixth or seventh year,” said Punjab finance minister Manpreet Badal. “We can’t forget the fact that the cess due to compensation ultimately needs to substitute in the revenues of the states and the Centre jointly post-2022. So, the solution that is given today is not satisfactory. We had no choice as this was the only solution placed on the table. We have asked for one week’s time so our cabinet will look into it.”

Chhattisgarh health minister TS Singh Deo said the states weren’t being treated fairly. “Compared to 2014 when the BJP government assumed office at the Centre, the excise duty on diesel has gone up nine times and on petrol by 3.5 times,” he said. “This additional revenue is being fully exploited by the Centre, while showing no concerns in protecting the financial interests of the states. Earlier, the decisions of GST Council meeting used to be based on complete consensus but now it has become majoritarian decision-making by steamrolling other views.”

However, Sushil Modi, deputy chief minister and finance minister of Bihar, hailed the Centre’s move.

“We welcome the options given by Nirmala Sitharaman. They’ve considered states’ demands. It has been assured that it will not be a burden on the exchequer,” said Modi. “Loan and interest will be repaid from the cess fund in both cases. States will not be deprived of the funds due to Covid… We will go into the details of options to decide on the option best for us.”

Finance secretary Ajay Bhushan Pandey said the GST shortfall for states, calculated at 14% compounded annual growth rate (CAGR) for FY21 is Rs 2.35 lakh crore, of which only Rs 97,000 crore is due to implementation of the tax, which was rolled out in July 2017, and the rest is due to the pandemic’s effects. He said GST collections had been severely impacted due to Covid-19.

The Union finance minister did not clarify whether the Centre will stand guarantee for the loans. There is all these kind of instrumentalities through which the Reserve Bank or the lender will be assured,” she said.

However, Punjab finance minister Badal said states had been assured that the Centre would stand guarantee for any borrowings by the states on this count.

The options are exclusively for the current financial year, finance secretary Pandey said. The council will review the options in early April 2021 as the economy may be in better shape by then, Pandey added.

Payment of principal and interest on these borrowings would be met by the cess collection with no liability of repayment falling on states. This would mean that the compensation cess, levied on select luxury and sin goods such as automobiles and cigarettes, may have to be extended beyond the five-year period, currently ending in 2022. The Centre will give a further relaxation of 0.5 percentage point in states’ borrowing limits under Fiscal Responsibility and Budget Management Act.

The council agreed that this was not the appropriate time to talk of higher tax rates, Sitharaman said in response to a query on whether any state raised the issue of an increase in the cess. Pandey said the repayment of loans, including interest payments, will be made through the cess collected from the sixth year onwards.

The council had met on Thursday to specifically discuss the issue of compensating states on account of revenue loss due to implementation of GST, deficit in the compensation cess fund due to the fall in tax collections and the attorney general’s opinion on the issue.