Special GST window: Centre borrows Rs 6,000 cr and releases to 16 states, 2 UTs

The Centre on Friday borrowed Rs 6,000 crore and distributed the amount among 16 states and two UTs under a special window meant for meeting the states’ Goods and Services Tax (GST) shortfall during 2020-21. The borrowing is at an interest rate of 5.19%, and for tenures in the range of 3-5 years, the finance ministry said in a statement.

The total borrowing limit under this window is pegged at Rs 1.1 lakh crore, which is the estimated combined shortfall for all states in the current year on account of GST implementation.

While 21 states and 2 union territories had agreed to the special window involving back-to-back borrowing coordinated by the union finance ministry, the government said that five states didn’t have any revenue shortfall.

“It is intended to make weekly releases of Rs 6,000 crore to the states,” the ministry said. The borrowing is to be financed out of proceeds from extended GST compensation cess.

The 16 states to which the first tranche of borrowed funds were released are Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Meghalaya, Odisha, Tamil Nadu, Tripura, Uttar Pradesh and Uttarakhand. The 2 Union Territories are Delhi and Jammu and Kashmir.

More states are expected to adopt the special borrowing window under Option 1 to make good their GST revenue shortfall from protected level. What has changed the mood among the dissenting states —now not more than 5-6 — is the Centre’s decision to borrow under the proposed special window and its assurance that along with additional unconditional open market borrowing (OMB), a total of Rs 2.16 lakh crore will be available to states in FY21. This amount is more than enough to address any cash flow problem that states could have faced due to GST shortfall in the year.

Sitharaman noted in a recent letter to states that adopted Option 1 that against the total estimated shortfall of Rs 2.35 lakh crore inclusive of the portion due to Covid-19, some `1.83 lakh would have been payable this year under normal course, and the rest only next year. So, the Rs 2.16 lakh crore available under the two tools would more than suffice to address the shortfall issue.

However, the mechanism might still involve a cost to the states. Under GST Compensation Act 2017, the states are guaranteed a 14% annual growth in the relevant tax revenues over five years till July 2022, meaning, such tax receipts would be their income sans any cost. While the interest cost on the special window is going to be covered by the GST compensation cess, the servicing cost of the additional unconditional OBM of 0.5% of GSDP may have to be borne by the states.

Kerala wants the Centre to borrow the entire GST compensation shortfall of Rs 1.83 lakh crore, which includes Rs 1.1 lakh crore on account of GST implementation and Rs 73,000 crore due to Covid-19. “Higher borrowing will not affect centre’s fiscal deficit. Fears of crowding out private investment is misplaced in recession,” Kerala finance minister Thomas Isaac tweeted recently.