Centre Seeks States’ Consent To Start GST Borrowing

The Ministry of Finance last month sought states’ consent to borrow back-to-back-loans to plug the shortfall in goods and services tax cess collections by June 15.

Providing clarity on the mechanism of the special window for GST borrowing, the central government, in a letter to states, said the interest will be paid from the GST compensation due to each state as and when it arises until the end of the transition period as defined in the GST Compensation to the States Act, 2017.

After that, principal and interest will also be paid from the cess by extending the levy for a period decided by the GST Council, the letter said.

BloombergQuint reviewed a copy of the letter. Emailed queries to a Finance Ministry spokesperson remained unanswered.

The letter explained that the first charge of the compensation cess each year would be the interest payable.

The central government will ensure that the repayment schedule is spread out during the extended period of the cess. And that would be done in such a way that 50% to 60% of the proceeds from the cess due to each state, after the interest payment, go into repaying debt and the rest is released against compensation arrears until the dues are cleared.

The government has projected the compensation required for the current year at Rs 2.7 lakh crore, assuming a nominal GDP growth of 7% for 2021-22. Of this, about Rs 1-1.1 lakh crore will likely be collected through the cess imposed, according to the proposal. The remaining Rs 1.59 lakh crore will be funded through borrowings by states via the federal government.

Last fiscal, the compensation cess fell short of Rs 2.35 lakh crore. The central government made up part of that by extending loans worth Rs 1.1 lakh crore to states. The rest, it argued, was on account of an unprecedented event (pandemic) that it was not liable to recompense. That Rs 1.25 lakh crore is to be funded by extending the cess levy beyond June 2022.

Finance Minister Nirmala Sitharaman had earlier said the same formula as last year will be adopted this year to fund the gap in cess collections.

The government’s GST collection for May fell below Rs 1 lakh crore for the first time in eight months as the second wave of Covid-19 infections stalled the nascent economic activity. The mop-up was 9.34% lower over a year earlier.

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