States To Get Covid-Related GST Shortfall If They Borrow From Special Window, Official Says
A bag showing GST placed outside the Parliament. (Source: PTI)

States To Get Covid-Related GST Shortfall If They Borrow From Special Window, Official Says

States will get the Covid-19 related shortfall in GST revenue if they opt to borrow Rs 97,000 crore from the special liquidity window to make up for the shortfall in compensation, a government official said.

The central government last month gave states two options for borrowing the shortfall in GST compensation. One involved raising Rs 97,000 crore, excluding the impact of Covid-19 on GST revenues, through a special window by the Reserve Bank of India, the principal and interest for which would be repaid by extending GST compensation cess beyond five years. The second involved borrowing the entire Rs 2.35 lakh crore, including the impact of Covid-19 on GST revenues, from the market but states would have to service the interest on this debt.

But the official quoted earlier said on the condition of anonymity, if states choose to borrow Rs 97,000 crore from the special window, they will receive the remaining Rs 1.38 lakh crore—the entire shortfall in GST revenue—after the principal and interest is repaid by extending the levy of compensation cess beyond five years. The remaining Rs 1.38 lakh crore, however, would be given to states in a staggered manner after the transition period of five years is completed.

This was communicated to all state finance secretaries in their meeting with union finance secretary and expenditure secretary on Sept. 1, he said.

Also read: GST Compensation: Fineprint Of The Two Options Offered By Centre To States

When GST was introduced in 2017, the central government had guaranteed states that it will compensate them for any loss incurred due to the implementation of GST at an annual 14% growth rate keeping 2015-16 as the base year. This compensation was promised as states were to lose their right to impose indirect taxes such as VAT. Since last year, with the slowing economy, the collections in compensation cess fund—used to compensate states by levying a cess on sin and luxury goods—were inadequate to pay states for the loss.

With Covid-19 outbreak, GST revenue declined further, increasing the amount to compensate states. The central government in the last GST Council meeting on Aug. 27 gave states the two options to borrow the required GST shortfall.

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