Centre to borrow on behalf of states to meet GST shortfall

  Central government will borrow up to Rs 1.1 lakh crore on behalf of states to bridge shortfall in GST collections, Finance Ministry said on Thursday.

A slowdown in ecomy since last fiscal has resulted in a drop in Goods and Services Tax (GST) collections, upsetting budgets of states which h given up ir right to levy local taxes such as sales tax or VAT when GST was introduced in July 2017.To make up for shortfall, borrowing from market was proposed.

In a statement, Union Finance Ministry said states were offered a special window to borrow Rs 1.1 lakh crore over and above ir existing limits, to bridge shortfall.

Under Special Window, estimated shortfall of Rs 1.1 lakh crore (assuming all States join) will be borrowed by Government of India in appropriate tranches,  statement said.

amount so borrowed will be passed on to States as a back-to-back loan in lieu of GST Compensation Cess releases. release, however, did t say who will service interest and principal payments. Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to minister.

borrowing, statement said, "will t have any impact on fiscal deficit of Government of India."

amounts will be reflected as capital receipts of State Governments and as part of financing of its respective fiscal deficits,it said.Borrowing of shortfall by Centre will avoid differential rates of interest that individual states may be charged and will be an ministratively easier arrangement, it ded.

"It may also be clarified that General Government (States+Centre) borrowings will t increase by this step," it said.

" States that get benefit from Special Window are likely to borrow a considerably lesser amount from ditional borrowing facility of 2 per cent of GSDP (from 3 per cent to 5 per cent) under Aatma Nirbhar Pack."

When GST was introduced in July 2017, states were promised a 14 per cent incremental revenue over ir last tax receipts in first five years of GST rollout. This was to be done through a levy of a cess or surcharge on luxury and sin goods, but collections on this count have fallen short with slowdown in ecomy since last fiscal.To make up for this, Centre suggested that states can borrow against future compensation receipts.

Finance Ministry h earlier this week stated that 21 states have accepted one of two borrowing options suggested by Centre. borrowing option was, however, t acceptable to states ruled by Congress and Left.

surcharge on cars and or luxury goods and tobacco products varies from 12 per cent to 200 per cent on top of highest GST rate of 28 per cent. It was due to expire in June 2022.This has w been extended beyond 2022.

Interest on borrowed amount would be first charge on cess, which gets collected beyond five years. next charge would be 50 per cent towards principal amount which gets borrowed, that is Rs 1.10 lakh crore and n remaining 50 per cent would be towards COVID-19 affected compensation.

Under GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs. On top of highest tax slab, a cess is levied on luxury, sin and demerit goods and proceeds from same are used to compensate states for any revenue loss.

payment of GST compensation to states became an issue after revenues from imposition of cess started dwindling since August 2019. Centre h to dip into excess cess amount collected during 2017-18 and 2018-19.

Centre h released over Rs 1.65 lakh crore in 2019-20 as GST compensation. However, amount of cess collected during 2019-20 stood at Rs 95,444 crore. compensation payout amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18.

During April-July of current fiscal, total compensation due to states stands at over Rs 1.51 lakh crore.