GST compensation: Why the Centre needs to yield a little more

October 26, 2020 7:10 AM

Now, either the Centre must borrow the remaining compensation amount of Rs 73,000 crore or the states’ borrowing to the extent of 0.5% of GSDP in lieu of the shortfall after the Centre’s back-to-back loans should also be serviced through future proceeds of the cess

However, states will have to service the debts raised under this unconditional window of 0.5% of GSDP from their own resources.However, states will have to service the debts raised under this unconditional window of 0.5% of GSDP from their own resources.

By GR Reddy

In her letter to chief ministers on October 15, the Union finance minister offered an olive branch to states in an attempt to settle the vexatious issue of GST compensation. Departing from its earlier rigid stand that states should borrow, the Centre agreed to borrow the amount of shortfall attributable to the implementation of GST and pass it on to states on a back-to-back basis. While the flexibility shown by the finance minister is welcome, it is not as if the demands of states have been fully met.

Under the option-1 offered to states at the 42nd meeting of the GST Council and the current offer, the distinction between the shortfall in compensation attributable to the implementation of GST and the total shortfall including the impact of Covid-19 continues to remain the same. The shortfall attributable to GST implementation 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 shortfalls were estimated by adopting a growth of 10% over the SGST revenues in 2019-20 (April 2019 to January 2020). Under the option-1 offered earlier, states were allowed to borrow Rs 1.1 lakh crore, the shortfall attributable to GST implementation under a special window with an interest subsidy of up to 0.5% to keep the cost at par or close to the G-Sec yield, in the event of cost being higher. The servicing of this loan would be done from the proceeds of cess. In addition, states were entitled to borrow unconditionally an amount of Rs 1.06 lakh crore, equivalent to 0.5% of the GSDP, the final instalment of the stimulus package announced on May 17, 2020.

The new offer made on October 15 is in lieu of the 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 the option-1. The only difference is that under the new dispensation, the amount of Rs 1.1 lakh crore attributable to the implementation of GST will be initially borrowed by the Centre in contrast to the borrowings by states. To that extent, the states’ demand that the Centre should borrow to make good the shortfall in GST revenue has been partially met.

The finance minister has contended that the total amount of Rs 2.16 lakh crore available to states under the new offer is more than the shortfall in compensation of Rs 1.83 lakh crore payable in the current fiscal (though the total shortfall is estimated at Rs 2.35 lakh crore, the compensation relating to February and March 2021 is payable in the next fiscal). Conceding that the amount of shortfall in compensation payable this year is Rs 1.83 lakh crore, states are still left with a gap of Rs 73,000 crore after taking into account the loan of Rs 1.1 lakh crore from the Centre. To facilitate states to meet this gap, the Centre has made unconditional the last instalment of the borrowing limit of 0.5% of GSDP under the May 17 stimulus package. It is true that some of the states would have foregone this last instalment in the event of their failure to meet three out of four reforms stipulated in the package. This relaxation enables all states to avail the last instalment of the package. However, states will have to service the debts raised under this unconditional window of 0.5% of GSDP from their own resources.

As the borrowings to the extent of 0.5% of GSDP are meant for making available to states additional funds in lieu of the remaining shortfall in cess after the Centre’s back-to-back loan, there is no case for burdening the states with debt servicing. Furthermore, states have to wait for an indefinite period to receive their balance in compensation dues of the current year as the interest payments and repayments will be the first charge on future proceeds of compensation cess. Only the balance left in the cess fund after the first charge will be available for distribution to states. In accordance with the GST Compensation Act, compensation shall be provisionally calculated and released at the end of every two months and shall be finally calculated for every financial year after the receipt of final figures as audited by the Comptroller and Auditor General of India. The payment cannot be postponed to an indefinite period.

States have already made two compromises. Their own tax revenue subsumed under GST is nearly 50% in contrast the Centre’s tax revenue of 31%. They have also implicitly agreed to the estimation of revenue loss based on 10% growth this year as compared with 14% stipulated in the GST Compensation Act. Although the Centre has agreed to borrow a portion of the shortfall in compensation, it needs to yield a little more as states are at the forefront of fighting Covid-19 and the economic slowdown.

Two options can be considered for an amicable settlement of the issues that remain unaddressed even after the new offer by the Centre. The first option is that the Centre will also borrow the remaining compensation amount of Rs 73,000 crore to be passed onto states on a back-to-back basis. To this extent, the amount of unconditional borrowing can be reduced. Having taken an accommodative stance, the Centre can be a little more magnanimous in the interests of harmonious Centre-state relations and regaining the trust of the states that has taken a beating on the GST compensation issue. The second option is that the states’ borrowing to the extent of 0.5% of GSDP in lieu of the shortfall in compensation cess after the Centre’s back-to-back loans will also be serviced through future proceeds of the cess. As the issue of shortfall in cess collections will continue for a few more years, the Centre exercising one of the two options as suggested above may smoothen the way for resolving any issues in the future in the implementation of GST.

The author was economic adviser, Ministry of Finance, and is currently adviser, Government of Telangana. Views are personal

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