GST shortfall: Tamil Nadu and Telangana may also agree to borrow

By: |
September 23, 2020 2:00 AM

Finance ministry sources had earlier claimed that 21 states had agreed to the Option 1 mooted by the Centre, which involves the states borrowing from the market amounts equivalent to their estimated FY21 GST revenue shortfall, just on account of GST implemennation.

Also, choosing this option closes the doors on carrying forward the unutilised part of additional borrowing to next financial year.Also, choosing this option closes the doors on carrying forward the unutilised part of additional borrowing to next financial year.

Among the states that are yet to respond formally to – and are believed to be against — the options mooted by the Centre to make good their GST revenue shortfall, at least two – Tamil Nadu and Telangana — may toe the Centre’s line by the next GST Council meeting on October 5, state and central government officials have indicated.

Finance ministry sources had earlier claimed that 21 states had agreed to the Option 1 mooted by the Centre, which involves the states borrowing from the market amounts equivalent to their estimated FY21 GST revenue shortfall, just on account of GST implemennation.

Apart from Tamil Nadu and Telangana, eight other states namely Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, West Bengal and Chhattisgarh are yet to respond to the Centre’s plans officially; many of them have been vocal against the idea of state borrowing to make good the shortfall, and insisted that instead, the Centre, as the sovereign, should raise funds from the market to bridge the shortfall in the compensation cess fund.

“The most important factor is money as states and Centre alike are starved of revenue, and the borrowing plan, even if not ideal, allows states the liquidity needed,” a state official said at the condition of anonymity. He added that some states who have been sitting on the fence about the proposal could finally agree to it.

While Tamil Nadu’s chief minister had written to the Prime Minister raising objection to the proposal, the state’s representative at GST Council meeting told FE that the proposal was being studied and a final decision would soon be conveyed to the Council.

“It (borrowing proposal) requires in-depth analysis as there are two options on the table. We are going to undertake the exercise and arrive at a decision soon,” D Jayakumar, minister of fisheries and personnel in Tamil Nadu government said.

As many as 21 states have so far chosen ‘option 1’ of the proposal, and the finance ministry sources have said that if the issue goes to vote, 20 states favouring the proposal will be enough to approve the plan. It is also likely that the states not agreeing to the plan could have wait till June 2022 for compensation payment as the GST Council would have to approve an extension of compensation cess collection period beyond the originally mandated five years of GST.

The Central government had presented the GST Council with two borrowing options in the 41st meeting in August. This was an alternative to fund the compensation payment as the dedicated fund for the same is grossly inadequate due to a progressively higher requirement and severe impact on collection due to pandemic.

Although even before the pandemic, the GST Council had discussed alternative options because it was apparent that guaranteeing states 14% year-on-year growth for the current fiscal was difficult in a slowing economy.
The Option 1 of the borrowing plan allows states to borrow a total of Rs 97,000 crore — an amount classified as shortfall due to GST implementation alone — from RBI under a special window coordinated by the Centre. The proposal promises that rates would be close to G-sec and interest and principal burden is to be borne by fund from compensation cess collected after June 2022.

Further, the borrowing would not be treated as debt on states’ books. The states were also told that they were entitled to full compensation — loss suffered due to GST implementation and as a result of Covid-19 — but the amount corresponding to the latter would come to them from compensation cess fund only after interest and principal for the loan has been paid.

The ‘option 2’ of the borrowing proposal allows states to borrow the entire Rs 2.35 lakh crore — total estimated GST shortfall from protected revenue for states this year, after adjusting for the compensation fund estimated of Rs 65,000 crore. But a part of this amount would be treated as debt in states’ books while they will have to bear the burden of interest payment on it also. Also, choosing this option closes the doors on carrying forward the unutilised part of additional borrowing to next financial year.

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