States may borrow to meet revenue short fall

Nirmala says economy to contract this year due to ‘Act of God’

NEW DELHI: The Centre on Thursday offered the states two options to plug a shortfall in their Goods and Services Tax (GST) revenue, estimated at ~2.35 lakh crore in the financial year that ends in March 2021, as the coronavirus disease (Covid-19) pandemic, which finance minister Nirmala Sitharaman likened to an “Act of God”, takes its toll on the economy. State governments were given a week to make a choice, triggering angry reactions from some Opposition-ruled states that said the decisions was thrust upon them.

The states can borrow ~97,000 crore at a reasonable interest rate from a special window that will be opened by the central government in consultation with the Reserve Bank of India (RBI), and repay the amount from the cess charged on luxury and sin goods such as liquor, cigarettes, aerated water and automobiles, after the GST regime completes five years of implementation in June 2022.

The second option is for the states to borrow the entire ~2.35 lakh crore in consultation with the central bank. Some Opposition-ruled states insisted that the Centre borrow the money instead and compensate the states for the shortfall.

“We told them that we will facilitate talking with RBI and help getting G security-linked interest rates so that each state does not have to struggle for

loans,” finance minister Sitharaman said after a five-hour 41st meeting of the GST Council, which is headed by her and comprises state finance ministers.

“The states have requested us to lay down both options in detail, and give them seven full working days to deliberate on it and get back. A brief GST Council meeting may be held again,” she said.“once the arrangement is agreed upon by GST Council, we can proceed fast and clear these dues and also take care of the rest of financial year.”

Sitharaman ruled out any general tax rate hike in the immediate future. The cess on luxury and sin goods will be extend beyond June 30, 2022, for at least another five years.

“Not considering any rate increases to make up for the shortfall in cess is a welcome measure; however, moving to a market borrowing mechanism which would extend the tenure of the cess beyond five years would worry businesses that are subject to the cess,” said MS Mani, partner at Deloitte India.

“Any decision to extend the cess beyond five years in order to fund the present compensation deficit could become a precedent; hence the period of extension of the cess should be minimal and predefined so that the cess does not become a permanent tax,” he said.