Centre to borrow on behalf of states to meet GST shortfall

Finance Minister Nirmala Sitharaman. (File photo)

The Central government will borrow up to Rs 1.1 lakh crore on behalf of the states to bridge the shortfall in GST collections, the Finance Ministry said on Thursday.

In a statement, the Union Finance Ministry said states were offered a special window to borrow Rs 1.1 lakh crore over and above their existing limits, to bridge the shortfall. “The amount so borrowed will be passed on to the states as a back-to-back loan in lieu of GST compensation cess releases,” the ministry said.

“Under the Special Window, the estimated shortfall of Rs 1.1 lakh crore (assuming all States join) will be borrowed by Government of India in appropriate tranches,” the statement said. The release, however, did not say who will service the interest and principal payments.

The Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer. The borrowing, the statement said, “will not have any impact on the fiscal deficit of the Government of India.”

“The amounts will be reflected as the capital receipts of the State Governments and as part of the financing of its respective fiscal deficits,” it said.

A slowdown in the economy since last fiscal has resulted in a drop in the Goods and Services Tax (GST) collections, upsetting the budgets of states which had given up their right to levy local taxes such as sales tax or VAT when GST was introduced in July 2017.

Former finance minister P Chidambaram welcomed the Centre’s change of stance. Taking to Twitter, the senior Congress leader said, “If the Centre has decided to borrow Rs 1.1 lakh crore and extend it to the states as a back-to-loans, I welcome the change of position. I thank all the economists, academics and newspaper editors who had supported our position.”

Opposition-ruled states have been locked in a battle with the Centre, opposing borrowing to be done by states to bridge the compensation deficit, and have instead demanded that the Centre should borrow to meet the compensation shortfall.

As reported earlier by The Indian Express, non-BJP ruled states are not in favour of pushing for a vote on the compensation matter but instead emphasise on setting up of the dispute resolution mechanism, which is already outlined in The Constitution (One Hundred and First Amendment), 2016, but was never put into motion ever since the July 2017 rollout of the indirect tax regime.

Earlier on October 5, during the 42nd GST Council meeting, as many as 10 non-BJP-ruled states rejected the two borrowing options floated by the Centre, while reiterating that the Centre needed to borrow money, instead of states, to bridge the compensation deficit of Rs 2.35 lakh crore this fiscal — and not make any distinction in revenue shortfall on account of GST implementation and the pandemic.

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