The Centre has finally yielded to the states in the running feud over who borrows funds to cover up the shortfall in the Goods and Services Tax collections in the past six months due to the pandemic.
The Finance Ministry on Thursday announced that the Centre has agreed to borrow funds in appropriate tranches to compensate the states with the GST shortfall of an estimated Rs 1.1 lakh crore.
The decision was taken in view of many states refusing to borrow money, as proposed by the finance ministry, asserting that the Centre is duty-bound to compensate the states as agreed upon at the time of enforcing the Goods and Services Tax uniformly across the country.
(The states, it will be recalled, had given up their right to levy local taxes such as sales tax or VAT when GST was introduced in July 2017. The slowdown in the economy since last fiscal has resulted in a drop in the GST collections, upsetting the state budgets)
A ministry press note said the amount so borrowed by the Centre will be passed on to the States as a back-to-back loan in lieu of GST Compensation Cess releases. The press note, however, did not say who will service the interest and principal payment.
But it claimed this will not impact the fiscal deficit of the Centre. It said the amounts will be reflected as capital receipts of the State Governments and as part of financing of their respective fiscal deficits.
The decision to let the Centre borrow instead of allowing the states do so is to avoid differential rates of interest that individual States may be charged for their respective SDLs and will be an administratively easier arrangement, the ministry said.
It clarified that the General 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 Aatma Nirbhar Package.
When the GST was introduced in July 2017, states were promised a 14 per cent incremental revenue over their last tax receipts in the first five years of the GST rollout. This was to be done through a levy of a cess or surcharge on luxury and sin goods, but the collections on this count have fallen short with the slowdown in the economy since last fiscal. To make up for this, the Centre suggested that the states can borrow against future compensation receipts.