GST compensation: Bengal, Kerala too pick option mooted by Centre

GST compensation: Bengal, Kerala too pick option mooted by Centre

The Centre has borrowed Rs 24,000 crore on behalf of the states in four instalments so far and passed it on to the eligible states and UTs.

The state governments of West Bengal and Kerala, which have been at loggerheads with the Centre over how to compensate the states for their GST revenue shortfall in FY21, given the paucity of the designated cess funds, also have accepted Option-1 mooted by the latter to meet the shortfall.

With this, 25 states and all three UTs with legislature — Delhi, J&K and Puducherry — have come to accept the Option-1.

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Under the mechanism, the Centre envisages to borrow a total of Rs 1.1 lakh crore via a special RBI window and transfer the funds to states as back-to-back loans sans any consequent fiscal impact on states.

Between them, West Bengal and Kerala will get Rs 10,197 crore under the special window. Further, the Centre has granted additional borrowing permission of Rs 4,522 crore to Kerala (0.5% of GSDP) and Rs 6,787 crore to West Bengal. The nod for additional borrowings is meant to be an incentive for states choosing the special window.

While there was almost a vertical division in the GST Council over the vexed compensation issue, the Centre finally managed to placate the states by agreeing to borrow (its initial stance was to make the states themselves borrow under a low-cost window facilitated by it).

The Centre has borrowed Rs 24,000 crore on behalf of the states in four instalments so far and passed it on to the eligible states and UTs.

The GST Council had estimated that against the total estimated shortfall (due to GST implementation and the pandemic) of Rs 2.35 lakh crore, some Rs 1.83 lakh would have been payable this year under normal course, and the rest only next year. Under GST Compensation Act 2017, the states are guaranteed a 14% annual growth in the relevant tax revenues over the five years through June 2022. The Council has already decided to extend the cess beyond June 2022 to mobilise resources for financing the special window.

Telangana and Rajasthan were the two states that climbed aboard the Option 1 bandwagon, just before West Bengal and Kerala.

The states which have opted for Option-1 so far are – Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Rajasthan, Sikkim, Telangana, Tripura, Tamil Nadu, Uttar Pradesh, and Uttarakhand and West Bengal, along with the three Union Territories of Delhi, Jammu & Kashmir and Puducherry. Jharkhand and Chhattisgarh are yet to accept the Option 1.

In a recent letter to Union finance minister Nirmala Sitharaman, West Bengal finance minister Amit Mitra has urged the Centre to borrow an additional Rs 72,000 crore under the special window to make good the states’ estimated GST revenue shortfall in FY21, in addition to Rs 1.1 lakh crore.

Mitra pointed out that the Centre has been able to borrow the initial compensation funds from the special window of RBI at a low rate of 5%, whereas the interest rate paid by the states for competitively borrowing from RBI auctions is as high as 6.8%. He also noted that the Centre “will neither have the burden of additional fiscal deficit nor the burden of debt servicing”.

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