finance | IST

Centre to borrow under GST special window for shortfall in compensation kitty

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The Centre on Thursday said that "the estimated shortfall of Rs 1.1 lakh crore (assuming all states join) will be borrowed by the government of India in appropriate tranches."

In a relief to the states which were demanding central borrowing to make good for the shortfall in the compensation cess kitty to pay off to the States, Centre on Thursday said that "the estimated shortfall of Rs 1.1 lakh crore (assuming all states join) will be borrowed by the government of India in appropriate tranches."
Implying that instead of the earlier stand where States were to borrow, now Centre will do the borrowing.
Clarifying the position in a press statement, the union finance ministry said, "Under option-I, states were to be provided with a special window of borrowing of Rs 1.1 lakh crore, and over and above that, an authorisation for additional Open Market Borrowings of 0.5 percent of their GSDP. The authorisation for increased OMBs of 0.5 percent of GSDP has been issued by the ministry of finance on October 13 and are in relaxation of the reform conditions that were stipulated for eligibility."
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"Additionally, under Option-I, the States are also eligible to carry forward their unutilised borrowing space to the next financial year. Under the special window, the estimated shortfall of Rs 1.1 lakh crore (assuming all States join) will be borrowed by the government of India in appropriate tranches," the finance ministry said.
The move comes as a shift of stand as over the last few GST Council meetings, there were heated discussions between the Centre and the States, only on the contentious issue, whether the States or the Centre should borrow.
At the end of the two-part 42nd GST Council meet, union finance minister Nirmala Sitharaman had said that Centre will not borrow and it is the States which have to borrow as central borrowing would shoot up the G-Sec rates and impact the bond market.
However, in a change in stance, only on the issue of who will be the borrowers, on Thursday, the Centre said it will be borrowing on behalf of States and will provide the "amount so borrowed will be passed on to the States as a back-to-back loan in lieu of GST compensation cess releases."
The union finance ministry also clarified that "this will not have any impact on the fiscal deficit of the government of India. The amounts will be reflected as the capital receipts of the State governments and as part of the financing of its respective fiscal deficits. This will avoid differential rates of interest that individual States may be charged for their respective SDLs and will be an administratively easier arrangement."
The change in stance comes after the Centre was working out the borrowing mechanism to allow 21 states and 2 union territories for the borrowing option-1, sought by them to begin the flow of borrowing, to ensure funds start flowing in the states kitty.
Meanwhile, sources clarified that the change in the authorisation of borrowing also comes with the fact that the borrowing will be considered as “back-to-back loan” and not as “compensation."
"The repayment mechanism will remain the same, as presented in the council. The repayment will be done by the collections under-compensation kitty post-June 2022. The first charge will be for paying the interest, second will be divided in paying the principal amount and the remaining compensation dues to the states," sources added.
Also, the union finance ministry in the statement also clarified that "it may also be clarified that the general government (States+Centre) borrowings will not increase by this step. The States that get the benefit from the special window is likely to borrow a considerably lesser amount from the additional borrowing facility of 2 percent of GSDP (from 3 percent to 5 percent) under the Aatma Nirbhar Package."
Abhishek Jain, tax partner, EY said, "The decided option is an iteration to the earlier proposed Option 1 by the central government; with this seemingly aiding in operational convenience and uniformity in the interest rate on the proposed borrowing. It would need to be seen now if the same is acceptable to all the States."
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