Centre gives states two options to meet GST compensation cess shortfall

Topics Centre | Market borrowings | GST

Finance Minister Nirmala Sitharaman said the Centre would facilitate the borrowing, by talking to the RBI | Photo: PTI
The Centre on Thursday offered two options to states to compensate them amid inadequate cess collections under the goods and services tax (GST) regime. 

One was an offer of a special window to states, in consultation with the Reserve Bank of India (RBI), to the tune of Rs 95,000 crore at a reasonable interest rate. The other was for states to borrow Rs 2.35 trillion from the market, with the RBI as a facilitator.  

However, the burden of repayment will not be on states. The timeline for cess imposed on sin and luxury goods will be extended beyond June 30, 2022 (up to which states are Constitutionally guaranteed compensation), to help service the debt.

Finance Minister Nirmala Sitharaman told the media that the Centre would facilitate the borrowing, by talking to the RBI. This is to ensure individual states do not rush to the market and raise bond yields.
According to government estimates, Rs 97,000 crore is the shortfall in compensation, as given in a formula under the law, with Rs 2.35 trillion the overall deficit factoring in the Covid situation.

Finance Secretary A B Pandey said collections from the compensation cess were estimated at Rs 65,000 crore for FY21. While the target for compensation under the law is Rs 1.62 trillion, accounting for the impact of Covid-19, the requirement stands at Rs 3 trillion, he added.

The Centre will provide details to states in a couple of days, and they will return to the next proposed Council meeting with their choice, said Sitharaman. 

The borrowing mechanism will be there for FY21, after which it will be reviewed in April 2021, said Pandey. 

States are guaranteed full compensation for the first five years of the GST regime in case they fail to record 14 per cent growth in revenues from GST on the base year of FY16. They are yet to get a rupee of compensation in FY21 against the requirement of Rs 1.5 trillion for the first four months, said Pandey.

Asked about the issue of raising cess or expanding the same, Sitharaman said the matter was not discussed in the meeting.

As to what the incentive is for states to go for just Rs 97,000 crore and not the entire Rs 2.35 trillion, the FM said it was up to them because some may not like to borrow the amount of shortfall caused by ‘act of God’ Covid-19.

Further, she disclosed that states would be given additional unconditional leeway of 0.5 percentage points of the GDP, as any additional borrowing will lead to fiscal deficit concerns.

States have already been given an unconditional 0.5 percentage point leeway over and above the 3 per cent under the Atmanirbhar Bharat package. Overall, they have been given a two-percentage-point flexibility, though the remaining 1.5 percentage points are based on riders like initiating power sector reforms, and taking steps towards ‘one nation one ration card’.

The GST Council meeting was called to discuss the single-point agenda of compensating states. The Centre also took the opinion of Attorney General K K Venugopal, who advised against taking recourse to the consolidated fund of India for compensating states. Governments — both the Centre and states — collected Rs 21,747 crore from the compensation cess in the first four months of FY21, which was two-thirds of the Rs 32,796 crore mopped up in the corresponding period of FY20.

In fact, collections were muted in the last financial year too. The collection was Rs 95,000 crore but states were given Rs 1.65 trillion after dipping into excess collections from cess of previous years.



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