The Central government borrows the funds under a special window and passes it on to states in back-to-back loan arrangement.
The Central government has released the thirteenth instalment of Rs 6,000-crore GST compensation payment to the states, the government said on Monday. The states and Union Territories have so far received Rs 78,000 crore of Rs 1.1 lakh crore to be disbursed by the Centre this fiscal.
The Central government borrows the funds under a special window and passes it on to states in back-to-back loan arrangement. The interest rate for the latest loan instalment was 5.31% while the average rate for the entire borrowing so far is at 4.75%, the government said.
While 23 states have been allotted Rs 5,516.6 crore in this round of weekly instalment, the remaining money (Rs 483.4 crore) has been released to the three Union Territories with a legislative assembly (Delhi, Jammu & Kashmir & Puducherry) which are members of the GST Council.
“The remaining five states, Arunachal Pradesh, Manipur, Mizoram, Nagaland and Sikkim do not have a gap in revenue on account of GST implementation,” the government said.
Although GST regime has a mechanism of compensation cess fund, which is made up of cess proceeds, to be used for compensating states in case of shortfall below their protected revenue each year. This guarantee of revenue protection is baked into the law and the states are entitled to a 14% y-o-y growth in their GST revenue.
However, since last year, the compensation cess fund has proved to be inadequate for the purpose. The Central government proposed this year that it would pay states through market borrowing but many states didn’t agree with the Rs 1.1 lakh crore estimated shortfall.
The Centre insisted that it would only pay to the extent of shortfall due to GST implementation issue and not Rs 1.85 lakh crore which is the revenue deficit that includes the pandemic-induced slowdown. After the initial logjam, all the states eventually came on board with the borrowing scheme.
In addition to providing funds through the special borrowing window to meet the shortfall in revenue on account of GST implementation, the Central government has also granted additional borrowing permission equivalent to 0.50 % of Gross States Domestic Product (GSDP) to the states choosing option-I to meet GST compensation shortfall to help them in mobilising additional financial resources.
“All the states have been given their preference for option-I. Permission for borrowing the entire additional amount of Rs 1,06,830 crore (0.50 % of GSDP) has been granted to 28 states under this provision,” the government said.