Centre, state finmin officials thrash out GST compensation gaps

Two days after the August 27 GST Council meeting, the finance ministry, in a letter to states, shared details of the two options, which states will examine over seven days
Senior central government officials held a meeting on Tuesday with finance secretaries of states to clarify the two borrowing options given to them to make up for the goods and services tax (GST) compensation shortfall, Business Standard has learnt.

The states were informed that if they take the option of borrowing Rs 97,000 crore under a special window, they will still get Rs 2.35 trillion minus Rs 97,000 crore from the compensation cess. The states were also told that in case of the second option of borrowing Rs 2.35 trillion through state development loans, the states will be given an unconditional borrowing room of 0.5 per cent over and above the borrowing limit increase given to them earlier. The meeting, held through video conference, was not attended by the political leadership of the Centre or any of the states.

“We are not telling them which option to take. That is a decision they will make. But we have given them a realistic picture. The second choice involves a higher general government debt,” a top government official said.

The official admitted that there had been miscommunication between the Centre and states in the GST Council meeting last week. “When two people have an interest in any financial question, there can never be great bonhomie. That basic dispute is there. But there is also much more noise than reality,” the official said.

Two days after the August 27 GST Council meeting, the finance ministry, in a letter to states, shared details of the two options, which states will examine over seven days.
The Centre gave states two options at the GST Council meeting for compensation: They can either borrow up to Rs 97,000 crore, which is a shortfall arising out of GST implementation or the entire Rs 2.35 trillion, which accounts for the Covid-19 situation.

States, if they take up the first option, will have to borrow Rs 97,000 crore through issue of debt under a special window coordinated by the ministry of finance. In case of the second option, the entire shortfall of Rs 2.35 trillion may be borrowed by states through issue of market debt. The official said there were a number of things that states had not understood. These was clarified during Tuesday’s meeting of bureaucrats. 

The official added, and it was also clarified in the letter to states earlier, that on the first option, the Centre will subsidise and make good the yield difference. 

“The yield will be subsidised, if necessary, because this paper will be backed by earmarked revenue collected through the central cess. We expect cost of borrowings to be reasonable. If they are higher than state development loan yields, we will subsidise them.”

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