The Centre on Thursday proposed two options for States to borrow in order to meet compensation shortfall. The States will come back within seven days and then GST Council will take final decision.
“Centre will work with RBI to facilitate borrowing so that interest rate does not vary,” Finance Minister Nirmala Sitharaman said after chairing five hours meeting of GST Council.
The meeting was called to discuss the means to meet the compensation shortfall. Initial estimate of total compensation requirement was around ₹3 lakh crore. The Government expects collection through GST compensation to be around ₹65,000 crore, while remaining would be shortfall. So now there are two options left to meet this shortfall.
During April-July, as per data released by the Central Government, the total GST compensation to be paid is ₹1.5 lakh crore.
Giving details about the two options, Finance Secretary Ajay B Pandey said that out of ₹2.35 lakh crore compensation shortfall, ₹97,000 crore is related to implementation issue. So, in the first option States can borrow ₹97,000 crore, while in the second option a total of ₹2.35 lakh crore can be borrowed. Repayment of principal and interest would be linked to compensation cess receivables. This means cess could be levied beyond five years on 29 items falling in 28 per cent rate category such as automobile, cement, and A/C.
Minister said that effort is to facilitate borrowing through special window of RBI. If States rush to open market, then there would be possibility of varying interest rates. She also explained that additional 0.5 per cent borrowing under FRBM (Fiscal Responsibility and Budget Management Act) of Gross State Domestic Product (GSDP) as provided under Atmanirbhar Bharat can be used for this purpose.
Commenting on the proceeding of GST Council meeting, Divakar Vijayasarathy, Founder & Managing Partner, DVS Advisors LLP said that the exercise is being done only for the current fiscal when it is obvious that the recovery is not going to be steep and the shortfall would extend to the next fiscal as well. The same exercise would have to be repeated next year and lose a substantial part of the year discussing again on the mechanism for making good the shortfall.
“Considering the current scenario of the economy, the states might be left with no other option but to list the council to consider increasing the cess or including more products or extending the levy of cess by some more years. In the case of approaching RBI instead of the market to avoid making the interest yield dearer to the states seems logical,” he said.
Sumit Batra, Partner at India Law Alliance said that cess payments to states have been overdue for some time and are being gradually released to States. “While the states are facing acute shortage of funds to meet their day to day expenses, the way Central Government has asked the states to borrow the shortfall from RBI at the reasonable rate of interest or to chalk out a plan in consultation with RBI will only result in collapse of respective state economy,” he said.