J’khand accepts Centre’s borrowing option on GST

As per finance ministry, all the 31 members of the GST council have now formally accepted the first borrowing option of ₹1.1 lakh

THE FINANCE MINISTRY ADDED THAT THE BORROWING WOULD “NOT HAVE ANY IMPACT ON THE FISCAL DEFICIT OF THE GOVT OF INDIA”

NEW DELHI: Jharkhand, the only remaining state to oppose the Centre’s borrowing plan for meeting the Goods and Services Tax (GST) revenue shortfall, has formally accepted the Union government’s proposal, the finance ministry said on Saturday.

With this, the 31 members of the GST Council – 28 states and 3 union territories -- have formally accepted the first borrowing option of ₹1.1 lakh crore proposed by the Centre in August , an official in the Union government said, requesting anonymity. The total revenue shortfall in 2020-21 is, however, estimated at ₹2.35 lakh crore.

“All the 28 states and 3 Union Territories with legislature have decided to go for Option-1 to meet the revenue shortfall arising out of the GST implementation. Jharkhand, the only remaining state, has now communicated its acceptance of Option-1,” the finance ministry said in a statement.

At the 41st GST Council meeting on August 27, the Centre offered two borrowing options to states to meet their revenue shortfall in the current financial year. Two days later, it specified that under the first option, states would not have to pay either the principle or interest if they borrow only ₹97,000 crore (later raised to ₹1.1 lakh crore) to meet the shortfall because of implementation issues. They would have to bear significant interest costs if they chose the larger borrowing option of ₹2.35 lakh crore that included revenue shortfall because the Covid-19 pandemic.

Initially 10 states – mostly administered by non-National Democratic Alliance (NDA) parties -- objected and insisted that the Centre borrow the entire amount and reimburse them for the shortfall without imposing any direct interest burden on states. These states were Chhattisgarh, Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana and West Bengal.

Some of the dissenting states eventually agreed for the first borrowing option after the Centre accepted one of their demands to borrow on behalf of the state and pass on the same to them through a special window set up on October 23. However, it did not accept the other demand of 10 dissenting states to borrow the entire ₹2.35 lakh crore that also included the part of revenue loss because of the Covid-19 pandemic.

“The Government of India has already borrowed an amount of ₹30,000 crore on behalf of the states in five instalments and passed it on to the states and union territories, who chose Option-1. Now the state of Jharkhand will also receive funds raised through this window starting from the next round of borrowing,” the statement said. The next instalment is due on December 7, 2020.

The Union finance ministry on October 15 said that the ₹1.1 lakh crore estimated shortfall in Goods and Services Tax (GST) compensation cess will be borrowed by the central government and “passed on to the states as a back-to-back loan”, allying concern of states that they would have to pay higher interest rates if they approach the market individually.

The Centre’s move, detailed in a statement from the finance ministry, is likely to put to rest, for now, the controversy over the compensation cess shortfall that had caused a major split in the GST Council, with no consensus being reached after three meetings. It also keeps the concept of fiscal federalism, the core of GST, alive.

The finance ministry statement added that the borrowing would “not have any impact on the fiscal deficit of the Government of India” and “be reflected as capital receipts of the state government as part of the financing of the respective fiscal deficits”. As a result, this borrowing doesn’t go into what is called general government borrowings (the debt of the Centre and the states).

“It appears that the loan is treated as capital receipts of the state governments, which will have some positive impact on state finances, but we need to see the fine print,” an official had said .

The minister said it is prudent for the Union government to borrow the entire amount to get a better rate, but there are other concerns – the Centre should have borrowed the entire shortfall (₹2.35 lakh crore) and repay from the compensation cess fund as the financial position of most of the states are precarious.

Kerala finance minister Thomas Isaac had welcomed the Centre’s move and asked for consensus on other matters. “I welcome the new announcement that Centre will borrow through special window and provide back to back loans to states in lieu of Compensation. But there is one issue yet to be resolved — how much of compensation is to be deferred 2023? Negotiate this point and reach a consensus,” he said in a tweet.