Centre Seeks States' Consent To Start GST Borrowing

In a letter, the Ministry of Finance had sought the states' permission to borrow in the form of back-to-back-loans by June 15.

Centre Seeks States' Consent To Start GST Borrowing

The Ministry of Finance last month sought states' consent to borrow back-to-back-loans to plug the shortfall in goods and services tax cess collections by June 15.

Providing clarity on the mechanism of the special window for GST borrowing, the central government, in a letter to states, said the interest will be paid from the GST compensation due to each state as and when it arises until the end of the transition period as defined in the GST Compensation to the States Act, 2017.

After that, principal and interest will also be paid from the cess by extending the levy for a period decided by the GST Council, the letter said.

BloombergQuint reviewed a copy of the letter. Emailed queries to a Finance Ministry spokesperson remained unanswered.

The letter explained that the first charge of the compensation cess each year would be the interest payable.

The central government will ensure that the repayment schedule is spread out during the extended period of the cess. And that would be done in such a way that 50% to 60% of the proceeds from the cess due to each state, after the interest payment, go into repaying debt and the rest is released against compensation arrears until the dues are cleared.

The government has projected the compensation required for the current year at Rs 2.7 lakh crore, assuming a growth of 7% in GST revenue for 2021-22. Of this, about Rs 1-1.1 lakh crore will likely be collected through the cess imposed, according to the proposal. The remaining Rs 1.59 lakh crore will be funded through borrowings by states via the federal government.

Last fiscal, the compensation cess fell short of Rs 2.35 lakh crore. The central government made up part of that by extending loans worth Rs 1.1 lakh crore to states. The rest, it argued, was on account of an unprecedented event (pandemic) that it was not liable to recompense. That Rs 1.25 lakh crore is to be funded by extending the cess levy beyond June 2022.

Finance Minister Nirmala Sitharaman had earlier said the same formula as last year will be adopted this year to fund the gap in cess collections.

The government’s GST collection for May fell below Rs 1 lakh crore for the first time in eight months as the second wave of Covid-19 infections stalled the nascent economic activity. The mop-up was 9.34% lower over a year earlier.

State-Wise Projections

In the letter, the government has also provided projections for the amount it will pay each state and union territory through the borrowings under the special window.

While Karnataka, Maharashtra, Gujarat and Punjab are projected to get the most through these back-to-back loans, the central government does not see a shortfall in GST cess requirement for five states—Sikkim, Arunachal Pradesh, Nagaland, Manipur and Mizoram.

Most states have already given their consent to start borrowing under the special window, two people in the know of the matter said.

Several states have been pushing the central government to start the borrowing for GST shortfall soon as the cost of borrowing is lower than the state development loans, one of the persons said.

These states include West Bengal and Maharashtra, where opposition parties are in power, and the Bharatiya-Janata Party-governed Gujarat, the person said.

According to CARE Ratings Ltd., the cost of borrowing for the states has risen by 16 basis points since mid-June and by 36 basis points since April. As on July 6, the weighted average cost of borrowing through the auction of dated securities across states and tenures was 6.92%, 7 basis points lower than that the auctions a week ago, the rating agency said.

The back-to-back loans to fund the shortfall in GST cess collections had a weighted average cost of 5% or less in the previous fiscal.

(Corrects an earlier version that misstated the growth parameter for calculating compensation cess.)

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.