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

A day after a five-hour long contentious GST Council meeting on the issue of revenue shortfall, the Government of India has sent a clear missive to the states — if states decide to borrow the entire amount of the estimated shortfall in compensation cess (Rs 2.35 lakh crore) it will have to be from the market and they’ll have to service the interest on such debt from their own resources. However, states that choose to borrow less, (Rs 97,000 crore), they will get a host of benefits including access to a special RBI borrowing window and no debt servicing liability.

The goods and services tax revenue has slowed to a trickle on account of a slowing economy, the pandemic and subsequent lockdowns. As a result, the collections will not be enough to meet the committed 14% annual increase in states’ GST revenue, as provided in the constitutional amendment. The centre has computed this shortfall at an estimated Rs 2.35 lakh crore but determined that only Rs 97,000 crore of that is on account of GST implementation, the rest is due to the pandemic, an ‘Act of God’ as Finance Minister Nirmala Sitharaman put it. Hence, the centre has concluded that it owes states only Rs 97,000 crore, even though many states argue that falls short of the constitutional commitment.

Given the state of its own resources the central government has asked states to borrow in order to cover the shortfall — as it has a “very large” borrowing requirement this year, and additional central government borrowing would influence bond yields, whereas if states borrow that may not be the impact.

So, on Thursday at the GST Council meeting, it gave states two options to meet the GST compensation shortfall. The fine print of the two options has been released today.

Option 1

This applies to states that choose to borrow to cover shortfall in compensation arising only due to the implementation of the GST, and not factoring in the impact of Covid-19. That cumulative amount is estimated by the centre at Rs 97,000 crore.

• A state picking this option can borrow via a special window by the Reserve Bank of India, that will be coordinated by the Ministry of Finance.
• The borrowing will be permitted “ over and above any other borrowing ceilings eligible under any other normal or special permission notified by Department of Expenditure”.
• The centre will endeavour to keep that cost of borrowing at or close to G-sec yields and subsidise the difference if any.
• The state will not have to service this borrowing from its own resources.
• The interest on the borrowing will be paid from compensation cess as and when it arises until the end of the transition period. Post the transition period or July 2022, the principal and interest will also be paid from proceeds of the cess, by extending the levy compensation cess as may be required.
• The borrowing under this special window will not be treated as debt of the state for any other norms prescribed by the Finance Commission.
• The centre has also relaxed conditions for overall borrowing limits that were enhanced recently on account of the pandemic. The state will also be allowed to carry forward unutilised extra borrowing ceilings subject to meeting the reform conditions.

Option 2

This applies to states that choose to borrow to cover the entire compensation cess shortfall. That cumulative amount is estimated by the centre at Rs 2.35 lakh crore.

• A state picking this option will have to borrow from the market.
• The state will have to service the debt from its own resources.
• The centre will repay principal on such debt from compensation cess proceeds collected after the transition period ends in July 2022.
• The centre will permit such borrowing but with restrictions.
• A state picking this option cannot avail of all of the recently enhanced borrowing limit. The reform-linked borrowing limit will be available but without any carry forward.
• To the extent of the shortfall arising due to implementation of GST (Rs 97,000 crore), the borrowing will not be treated as debt of the state.

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 statement said.

The first charge on the compensation cess each year would be the interest payable (for states picking option 1); the second charge would be the principal repayment (for all states). The remaining arrears of compensation accrued during the transition period would be paid after the interest (for states picking option 1) and principal are paid.

The states have a week to decide between the options.

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