GST compensation: FinMin releases eighth instalment of Rs 6,000 crore to states

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December 22, 2020 12:45 AM

The Central government borrows the funds under a special window and passes it on to states in a back-to-back loan arrangement.

“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.“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.

The Centre has released the eighth instalment of Rs 6,000 crore as GST compensation payment to states, the government said on Monday. States and union territories have so far received Rs 48,000 crore of the 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 a back-to-back loan arrangement. The interest rate for the latest loan instalment was 4.19%, while the average rate for the entire borrowing so far is at 4.7%, the government said.

While 23 states have been allotted Rs 5,516.6 crore in this round of weekly instalment, the remaining Rs 483.4 crore has been released to the three union territories with legislative assemblies (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.

The GST regime has a mechanism of a compensation cess fund, which is made up of cess proceeds, to make up any shortfall below the states’ protected revenue each year. This guarantee of revenue protection is baked into the law and 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. The Central government proposed this year that it would pay states through market borrowing, but many states didn’t agree with the shortfall estimate of Rs 1.1 lakh crore.

The Centre insisted that it would only pay for the shortfall due to GST implementation and not Rs 1.85 lakh crore, which is the revenue deficit taking into account the pandemic-induced slowdown. After initial logjam, all the states eventually came on board with the borrowing scheme.

The Central government has also granted additional borrowing permission equivalent to 0.5% of Gross States Domestic Product (GSDP) to states choosing option-I to meet GST compensation shortfall to help them mobilise 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 (0.5% of GSDP) has been granted to 28 states under this provision,” the government said.

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