Centre writes to states suggesting choices of borrowing cash to make up for GST shortfall

New Delhi, August 29

The central authorities on Saturday wrote to states suggesting choices of borrowing cash to make up for the Rs 2.35 lakh crore shortfall in GST revenues anticipated within the ongoing fiscal.

Two days after first suggesting to states to borrow cash to make up for the shortfall on the GST Council assembly, the finance ministry wrote to state governments saying they might both borrow by way of a particular window that it’ll facilitate via the RBI or elevate debt from the market.

While the Centre has reasoned its suggestions on premise that it’s already saddled with a big borrowing requirement given the slowdown in income collections because of a droop within the economic system, non-BJP dominated states akin to Punjab, Kerala, Delhi and West Bengal have already said that elevating debt is just not an choice for already stretched state funds.

In a letter to finance secretaries of all states and union territories, Union Finance Secretary Ajay Bhushan Pandey mentioned whereas extra borrowing by the Centre influences the yields on central authorities securities (G-secs) and has different macro-economic repercussions, the yields on state securities don’t instantly affect different yields and shouldn’t have the identical repercussions.

“Hence, it is in the collective interest of Centre and states and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the central level when it could be done at the state level,” Pandey wrote within the letter.

Compensation cost has been a problem since August 2019 with GST collections faltering. In the present fiscal, the compensation requirement of states has been estimated at Rs three lakh crore, of which Rs 65,000 crore could be funded from the revenues garnered by levy of cess. This leaves a shortfall of Rs 2.35 lakh crore.

The Centre has estimated that of this Rs 2.35 lakh crore, Rs 97,000 crore compensation requirement is because of GST rollout and the remaining is on account of the influence of COVID-19 on the economic system.

In the GST Council assembly on August 27, Finance Minister Nirmala Sitharaman had mentioned that COVID-19 is an “Act of God” and it was essential to differentiate between GST shortfall and the pandemic-related shortfall.

Giving two choices, she mentioned states can borrow both Rs 97,000 crore—the deficit arising out of GST implementation—or your complete Rs 2.35 lakh crore.

States, on their half, have mentioned that such a distinction is just not constitutionally legitimate.

Explaining intimately the borrowing choices to fulfill shortfall, Pandey mentioned borrowing by states usually incurs a better curiosity value than borrowing by the Centre.

“The Government of India is conscious of this and has factored this (in the options) with a view to protecting the states so that they are not adversely affected,” he wrote.

Under the primary choice, if the states select to borrow Rs 97,000 crore, which is the shortfall arising out of GST implementation, below a particular window, the Centre will endeavour to maintain the price at or near the G-sec yield.

Such a borrowing could be over and above another borrowing ceilings for which a state is eligible.

“The interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period… The state will not be required to service the debt or to repay it from any other source,” the letter added.

“The borrowing under the special window will not be treated as debt of the state for any norms which may be prescribed by the Finance Commission etc,” It mentioned.

Under the second choice, your complete shortfall of Rs 2.35 lakh crore will likely be borrowed by states via concern of market debt.

The curiosity shall be paid by the states from their assets, whereas the principal on the quantity below will likely be paid from proceeds of the cess.

“To the extent of the shortfall arising due to implementation of GST (i.e. Rs 97,000 crore approximately in aggregate), the borrowing will not be treated as debt of the state for any norms which may be prescribed by the Finance Commission etc,” the letter added.

Pandey mentioned the GST Act lays out the spirit and goal of the GST compensation—to compensate states for lack of income “arising on account of implementation of GST”.

“The wording of the Constitution and statutory preamble make it clear that the spirit of the law is not to compensate states for all types of revenue losses, but rather for that loss arising from GST implementation,” he mentioned.

“It is the correct and proper interpretation which was thoroughly discussed in the GST Council and in Parliament before the relevant legislation was passed,” it mentioned.

“The Government of India will support extension of the compensation cess for such period as may be necessary to completely discharge any arrears of compensation,” Pandey mentioned.

Pandey together with Expenditure Secretary TV Somanathan would handle queries of the states relating to those choices on September 1, an official assertion mentioned. PTI

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