IAS Gyan

Daily News Analysis

GST compensation

11th November, 2020 Economy

Context: After Puducherry, Rajasthan became the latest state to opt for a special borrowing window for meeting its compensation shortfall under Goods and Services Tax (GST).

  • Kerala, Punjab, West Bengal, Chhattisgarh, Jharkhand — are yet to join any borrowing options floated by central government to resolve the issue of compensation deficit.
  • Borrowing has been made very simple for States by keeping the interest rate low.

What is the special window for borrowing?

  • Centre would borrow from the market and then act as an intermediary to arrange back-to-back loans to pay the GST compensation shortfall of Rs 1.1 lakh crores to state governments.
  • This arrangement will not reflect in the fiscal deficit of the Centre, and will appear as capital receipts for state governments.
  • The total GST revenue shortfall for the current fiscal was estimated at Rs 3 lakh crore, of which compensation cess collection was estimated at Rs 65,000 crore, leaving a compensation deficit of Rs 2.35 lakh crore.
  • Of this Rs 2.35 lakh crore, Rs 1.1 lakh crore has been estimated as shortfall on account of GST implementation, while the rest is being estimated as the impact of the pandemic.
  • In August, the Centre gave two options to the states — either borrow 1.10 lakh crore from a special window facilitated by the RBI, or borrow Rs 1.8 lakh crore from the market.

Why states not borrowing instead of the Centre enabling the borrowing?

  • One of the primary concerns for that mechanism was that states, would have tapped the market for borrowing separately, leading to differential rates with a wide variance in interest rates between the states with more debt and those with less debt.
  • Yields for state development loans (SDLs), which is the tool for market borrowing by states, are generally at a premium, higher than the yield on the central government’s government securities.
  • It would have been costlier for states to borrow rather than the Centre borrowing at a uniform rate and then passing it on to them as a back-to-back loan.

How has the scheme progressed so far?

  • Under the special window, the Centre has already borrowed Rs 12,000 crores in two equal instalments and passed it on to 21 states and three Union Territories.
  • The first tranche of the borrowing was transferred Rs 6,000 crore to 16 states and two UTs, including Maharashtra, Gujarat, Karnataka, Himachal Pradesh, Bihar, Goa, Assam, Uttar Pradesh, Delhi and Jammu & Kashmir.

What is the way forward for the rest?

  • The Finance Ministry is now engaged in dialogue with the opposing states to join the scheme.
  • Borrowing issue has only been resolved for the compensation shortfall for this fiscal and bigger question is what is going to happen in FY2022.
  • Rather than waiting for the last moment and doing back and forth, the GST Council should have thrashed out a resolution.