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Now either the Center has to borrow the remaining compensation amount of Rs 73,000 crore or borrowing from the States to the tune of 0.5% of the GSDP instead of the shortfall after the Centre’s back-to-back loans are also expected to be funded by the future proceeds of the cess

By GR Reddy

In her October 15 letter to Chief Ministers, the Union Finance Minister offered an olive branch to states in an attempt to settle the vexatious issue of GST compensation. Deviating from its previous rigid position that states should borrow, the Center agreed to borrow the amount of revenue shortfall attributable to the implementation of the GST and pass it on to the states on a rolling basis. While the flexibility shown by the Minister of Finance is welcome, it is not as if the demands of the States have been entirely satisfied.

Under Option-1 offered to States at the 42nd meeting of the GST Board and the current offer, the distinction between the loss of compensation attributable to the implementation of the GST and the loss to be won total, including the impact of Covid-19, remains the same. The shortfall attributable to the implementation of GST was estimated at Rs 97,000 crore, which was later revised to Rs 1.1 lakh crore, and the total shortfall was estimated at Rs 2.35 lakh crore.

These revenue shortfalls have been estimated assuming 10% growth over SGST revenue in 2019-20 (April 2019 to January 2020). Under Option 1 proposed earlier, states were allowed to borrow Rs 1.1 lakh crore, the shortfall attributable to the implementation of GST under a special window with a bonus of interest of up to 0.5% to keep the cost at par or close to the G-Sec yield, in the event of higher cost. This loan would be serviced from the proceeds of the cess. In addition, states had the right to unconditionally borrow an amount of Rs 1.06 lakh crore, equivalent to 0.5% of the GSDP, the final tranche of the stimulus package announced on May 17, 2020.

The new offer made on October 15 replaces Option 1 offered to states earlier. Under the new offer, the amount that will be available to States will be the same as that available under Option-1. The only difference is that under the new waiver, the amount of Rs 1.1 lakh crore attributable to the implementation of the GST will initially be borrowed by the Center unlike the borrowings of the states. To this extent, the States’ request that the Center should borrow to fill the GST revenue shortfall has been partially met.

The finance minister argued that the total amount of Rs 2.16 lakh crore available to states under the new offer is greater than the shortfall of Rs 1.83 lakh crore payable in the current financial year (although the total shortfall is estimated at Rs 2.35 lakh crore, the compensation relating to the months of February and March 2021 is payable in the next financial year). Conceding that the amount of shortfall in compensation payable this year is Rs 1.83 lakh crore, the states are still left with a gap of Rs 73,000 crore after factoring in the loan of Rs 1.1 lakh crore from the Center. To help states bridge this gap, the Center made the final installment of the 0.5% GSDP borrowing limit under the May 17 stimulus package unconditional. It is true that some states would have waived this last installment if they had not complied with three of the four reforms provided for in the package. This relaxation allows all States to benefit from the last tranche of the package. However, the States will have to service the debts contracted within the framework of this unconditional window of 0.5% of the GSDP from their own resources.

Given that the 0.5% borrowings from the GSDP are intended to make additional funds available to States in lieu of the shortfall remaining after the Centre’s back-to-back loan, there is no reason to to impose debt service on States. Additionally, states must wait an indefinite period to receive their current year compensation balance, as interest payments and refunds will be the first charge on future compensation proceeds. Only the balance remaining in the Cess Fund after the first charge will be available for distribution to the States. In accordance with the GST Indemnity Act, the indemnity is provisionally calculated and published at the end of every two months and is finally calculated for each financial year after receipt of the final figures audited by the Comptroller and Auditor General of the India. Payment cannot be deferred indefinitely.

States have already made two compromises. Their own tax revenues included in the GST represent nearly 50%, while the Centre’s tax revenues are 31%. They also implicitly accepted the revenue loss estimate based on 10% growth this year versus 14% stipulated in the GST Offset Act. Although the Center agreed to borrow part of the shortfall in compensation, it must give up a little more because the States are on the front line to fight against Covid-19 and the economic slowdown.

Two options can be envisaged for an amicable settlement of the questions that remained unanswered even after the Centre’s new offer. The first option is that the Center will also borrow the remaining compensation amount of Rs 73,000 crore to be passed on to the states on a consecutive basis. To this extent, the amount of unconditional borrowings may be reduced. Having taken a dovish stance, the Center can be a bit more magnanimous in the interest of smooth center-state relations and regaining the trust of states that have taken a beating over the issue of GST compensation. The second option is that state borrowings of 0.5% of the GSDP instead of the compensation tax shortfall after the Centre’s back-to-back loans will also be covered by future tax proceeds. Since the problem of shortfall in tax collections will continue for a few more years, the Center exercising one of the two options suggested above can facilitate the resolution of any problems in the future in the implementation. of the GST.

The author has served as an economic adviser to the Ministry of Finance and is currently an adviser to the government of Telangana. Views are personal

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