GST: Karnataka to follow Option One, meet reform-linked timelines for additional borrowing, says Home Minister

BENGALURU: Karnataka Home Minister Basavaraj Bommai, who represents the State in the GST Council, said they have decided to exercise the first option to claim GST compensation after weighing the pros and cons, and considering the advantages it offered.

The GST Council, which met on August 27 to discuss the subject of GST compensation payable to states, placed two options before the states. While the first option covered only the revenue shortfall arising out of the GST implementation, the second one also covered the shortfall in collections due to Covid-19 alongside the GST implementation.

Bommai told ET that the state government decided in favour of option one because it does not cast any financial burden on the state, and gave the state the additional leverage of borrowing 2% of GSDP over and above the FRBM limits, both with and without conditions. "This will help us tide over the present crisis and align with the larger economic re-conditioning, even as we continue with our welfare programmes. We are confident of meeting all reform-linked timelines,” he said.

The government, in a media statement said, it was happy that the Centre has recognised and accepted the rights of states with regard to their entitlement to the entire compensation under the GST. The collections out of the GST cess levied on sin and luxury items will meet the arrears of compensation during the transition period, and the Centre has hinted at extending the GST cell beyond the transition period of five years, which will end on June 30, 2022.

Karnataka would be eligible for a total compensation of Rs 18,289 crore under the first option. Out of this, the GST cell collections will provide Rs 6965 crore. As for the remaining Rs 11,324 crore, the state government would be able to borrow through a special window which the Centre will facilitate with RBI’s help. The GST cess will bear the burden of principal and interest repayment for the funds raised through the market borrowing.

The first option will also entitle the State to an additional borrowing of up to 1% of GSDP (Rs 18,036 crore) without any conditions. The state can also borrow another 1% but subject to conditions linked to the government meeting timeline-linked reforms. Another advantage is these additional borrowings can also be carried forward to the next financial year.

Under the second option, Karnataka would be eligible for a total compensation of rs 25,508 crore. The GST cess, however, would release Rs 6965 crore, as usual. As for the remaining Rs 18,543 crore, the State can raise a market debt. This option, however, does not provide for unconditional borrowing of up to 1% of GSDP. As a result, the government statement said, the net borrowing of the State will reduce substantially by about Rs 10,817 crore. The biggest negative the state government saw in the second option was the government would have to pay the interest on the market debt from its own resources.