GST compensation: Centre will borrow to meet shortfall

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The Union government will borrow from the market to pay GST compensation shortfall of Rs 1.1 lakh crore to states and pass it on as a back-to-back loan, in a major departure from its earlier stance that states must undertake market borrowings themselves. The borrowings will not reflect on the Union Budget, but will appear as capital receipts in state budgets.

Twenty-one states and Union Territories had accepted the Union government’s proposal seeking states to borrow to meet the shortfall with repayments to be made from future GST cess collections. The proposal met with resistance from Kerala and West Bengal, which were preparing to challenge the move in the Supreme Court. The GST Council meeting on Monday had failed to resolve the dispute over the borrowing options.

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“The government (states+Centre) borrowings will not increase by this step. The states that get the benefit from the special window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2% of GSDP (from 3% to 5%) under the Atma Nirbhar package,” a finance ministry said statement said on Thursday.

The Union government had asked the states either borrow Rs 97,000 crore from a special RBI window or to undertake market borrowings to the tune of Rs 2.35 lakh crore. The finance ministry had agreed to extend the levy of compensation cess on luxury and sin items beyond 2022 to help states make the repayment.

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The government expects a GST revenue shortfall of Rs 3 lakh crore in the current financial year. It expects to collect Rs 65,000 crore as compensation cess, which will leave a compensation shortfall of Rs 2.35 lakh crore. Of this amount, Rs 1.1 lakh crore is estimated to be on account of GST implementation.

Kerala finance minister welcomed the announcement but sought clarity on how much of the compensation is to be deferred to 2023. He urged the Centre to provide full compensation payment of ₹ 2.3 lakh crore in the current year itself. He said the centre should not hesitate to borrow Rs 1.7 lakh crore instead of Rs 1.1 lakh crore offered at present as the arrangement do not reflect on the fiscal deficit of the Centre.