Compensation payment has been an issue since August 2019 with GST collections faltering. In the current fiscal, the compensation requirement of states has been estimated at Rs 3 lakh crore, of which Rs 65,000 crore would be funded from the revenues garnered by levy of cess. This leaves a shortfall of Rs 2.35 lakh crore.
The Centre has estimated that of this Rs 2.35 lakh crore, Rs 97,000 crore compensation requirement is due to GST rollout and the remaining is on account of the impact of Covid-19 on the economy.
“The government of India is committed to implementation of the GST Act in letter and in spirit—in letter by adhering to the legal provisions and in spirit by honouring the commitment made by the former chairperson Shri Arun Jaitley in regard to the manner of meeting the shortfall,” the official statement said.
“In accordance with this commitment, certain options for borrowing are presented. The government will support extension of the Compensation Cess for such period as may be necessary to completely discharge any arrears of compensation,” it added.
The statement also said that the Centre’s revenues are under great strain not just because of the pandemic but also due national security. Hence, it is in the collective collective interest of both Centre and states, as well in the interest of the nation and of all economic entities not to do any avoidable borrowing at the Central level when it could be done at the state level.
“Borrowing by states typically incurs a higher interest cost than borrowing by the Centre. The government of India is conscious of this and has factored this, with a view to protecting the states so that they are not adversely affected.” the statement read.
Here are the key details of the two options:
* The shortfall arising out of GST implementation (calculated at Rs 97,000 crore approximately) will be borrowed by States through issue of debt under a Special Window coordinated by the ministry of finance.
* It will be the endeavour to ensure steady flow of resources similar to the flow under GST compensation on a bi-monthly basis.
* The government will endeavour to keep the cost at or close to the G-sec yield, and in the event of the cost being higher, will bear the margin between G-secs and average of State Development Loan yields up to 0.5% (50 basis points) through a subsidy.
* A special borrowing permission will be given by the government under Article 293 for this amount, over and above any other borrowing ceilings eligible under any other normal or special permission notified by department of expenditure.
* The interest on the borrowing under the Special Window will be paid from the Cess as and when it arises until the end of the transition period. After the transition period, principal and interest will also be paid from proceeds of the Cess, by extending the Cess beyond the transition period for such period as may be required. The state will not be required to service the debt or to repay it from any other source.
* The borrowing under the Special Window will not be treated as debt of the state for any norms which may be prescribed by the Finance Commission etc.
* The entire shortfall of Rs 2,35,000 crore (including the Covid-impact portion) may be borrowed by States through issue of market debt.
* The interest shall be paid by the States from their resources.
* The principal on the amount under will, after the transition period, be paid from proceeds of the Cess. The states will not be required to repay the principal from any other source.
* To the extent of the shortfall arising due to implementation of GST (Rs 97,000 crores approximately in aggregate) the borrowing will not be treated as debt of the State for any norms which may be prescribed by the Finance Commission etc.
* The Compensation Cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the states. The first charge on the future Cess would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the principal is paid.
States can chose either of the options and give their preference and views thereon within seven working days.
Consequently, a meeting of state finance secretaries with the Union finance secretary and secretary (expenditure) has been scheduled to be held on September 1, 2020 for clarifying issues, if any, the finance ministry said in a tweet.
States have to communicate their preference within seven working days. A meeting of State Finance Secretaries with… https://t.co/1GXk6xF5bo
— Ministry of Finance (@FinMinIndia) 1598696952000
Both options will be available to the states only for the current fiscal. In April 2021, the Council will review and decide action for the next year.
Stating the Covid-19 pandemic to be an ‘act of God’ finance minister Nirmala Sitharaman had said the economy has been hit hard and will see a contraction in the current fiscal. Hence, it was necessary to differentiate between GST shortfall and the pandemic-related shortfall.
“This year we are facing an extraordinary situation that even below 10 per cent approximate estimation you are facing an ‘Act of God’ which might even result in a contraction of the economy…,” Sitharaman said after the 41st GST council meet two days back.