Centre may tweak special window borrowing terms for GST compensation

Wednesday, Sep 16, 2020


–Govt source: May offer more than 970 bln rupees via GST special window
–May agree to a lower nominal growth to peg GST losses 

–Assumed nominal growth of 10% for FY21 to peg GST losses 
–States want tweak in formula used to peg GST rollout losses 
–May extend repayment period under GST special window 


By Adrija Chatterjee and Saji George Titus


NEW DELHI — In a bid to get more states on board to borrow from the special window to bridge the shortfall in goods and services tax compensation, the Centre is likely to increase the amount offered through the window and extend the period for repayment, a senior government official said. 


Some states have suggested tweaking the formula used to estimate the shortfall on account of implementing GST and the Centre is considering it, the official told Cogencis.


The Centre has estimated the shortfall on account of implementing GST at 970 bln rupees, assuming a nominal GDP growth of 10% for 2020-21 (Apr-Mar) had there been no pandemic.


If the Centre agrees to a lower nominal GDP growth, the shortfall on account of implementing GST will be higher. "We are not fixated on 10% (nominal growth)," the official told Cogencis.


Though the overall shortfall in GST compensation is estimated at 2.35 trln rupees in 2020-21, the Centre wants to differentiate between shortfall on account of implementation of the new tax regime and that due to the pandemic or "Act of God".


At a GST Council meeting last month, the Centre had offered states two options to bridge the shortfall–borrow 970 bln rupees from a special window at attractive terms or borrow the entire 2.35 trln rupees from the market.


If the states borrow from the special window, the interest and principal repayment will be completely borne from cess collections, while the interest on market borrowing will have to be paid by states from their own revenues.


Some states have also requested relaxations on repayment terms on borrowing from the special window, the official said.


As per the Centre's original proposal, after the fifth year, the first and second charge on cess collections will be on interest payments and principal repayment, respectively.


States have suggested they want the second charge on cess collections to be divided between the principal repayment and payment to states. 


"We have agreed to consider that and are examining it," the official said. 


The Centre has also promised to keep the interest on borrowing from the special window close to the yield on central government bonds by partly subsidising it. 


Many Opposition-ruled states have rejected both the options offered by the Centre to bridge the gap in GST compensation. They are demanding that the Centre, instead of the states, borrow the amount and pass on the funds. 


The shortfall in GST compensation has been a thorny issue between the Centre and states.


When the GST was implemented in 2017, the Centre had agreed to compensate states for the shortfall in revenues on account of implementation of the new indirect tax regime for the first five years.


The compensation is paid out of a fund by levying cess on luxury and sin goods like automobiles and cigarettes. However, the fund has run out of money because of the pandemic making it difficult for the government to compensate states in a timely manner.


The total GST compensation due in Apr-Jul is a whopping 1.51 trln rupees compared with cess collections of 438 bln rupees during the period.


According to government data, GST collections of states have contracted 30% on year in Apr-Aug as the lockdown brought economic activity virtually to a standstill in the first two months of the year. 


The total GST collections in Apr-Aug declined 30.9% on year to 3.59 trln rupees.  End


Edited by Aditya Sakorkar


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