GST Council gives two options to bridge compensation shortfall — states ask for seven working days to make up their mind

Finance Minister Nirmala Sitharaman chaired the 41st meeting of the Goods and Services Tax (GST) Council today to discuss how to compensate states for their revenue shortfall due to impact of COVID-19BCCL
  • The Goods and Services Tax (GST) Council has given the states two options for how states can make up for the shortfall in GST revenue collection this year.
  • States can either pick up ₹97,000 crore through a ‘special window’ provided by the Reserve Bank of India (RBI) at a reasonable interest rate or they can borrow the entire ₹2,35,000 crore in one go. Either way, the interest payments will come out of the compensation cess.
  • The Finance Ministry estimates that the GST shortfall for this financial year will be around ₹2,35,000 crore.
The GST Council has put out two options for states in how they want to claim their compensation. They can either pick up the entire compensation right now by borrowing or they can only pick up a limited amount through a ‘special window’ provided by the Reserve Bank of India (RBI), and the rest will come their way at the end of 2022.

States have asked for more details and for another seven days to respond. “We may have another meeting or we’ll directly roll out the plan depending on the responses from the states,” said Finance Minister Nirmala Sitharaman.

The Finance Ministry estimates the shortfall in cess collection this year will be around ₹2,35,000 crore. In the last four mounts, the shortfall of ₹1,50,000 crore has already been accrued due to the impact of COVID-19.

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The problem is that states have planned their budget according to the GST revenues that were supposed to come in. Without that money, many development projects or public good spending will be left awry.

Two options, twenty-eight states
In the first option put forward by the Finance Ministry, states can choose to pick up ₹97,000 crore from RBI at a reasonable interest rate instead of pulling in the entire amount that’s due.

This amount will be repaid over the next five years through the collection of cess.

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However, this doesn’t mean that states will lose out of their entitlement. Whatever they haven’t borrowed, will be paid to them at the end of 2022.

The second option that has been put on the table proposes that states can borrow the entire gap of ₹2,35,000 crore right now.

“In both options, there shall not be a burden on the state, it will be paid by the compensation cess that will be collected,” said Sitharaman. She added that the centre can facilitate borrowings from RBI but the loans will be in the name of states.

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According to Sitharaman, whichever of the two options is chosen will only apply for this fiscal year. The financial situation and the decision on how much money is needed by the states will be revisited at the end of the financial year when the GST Council meets up in April 2021.

Currently, there are two bi-monthly dues around to ₹1,50,000 crore still pending. Even March’s compensation was delayed and only doled out in July.

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