3.1 C
California
Wednesday, March 3, 2021

GST Compensation: Have the states and the centre reached a solution yet?

Must read

The government sends notice to vacate houses to several eminent artistes including Pandit Birju Maharaj

Last month, a lot of eminent artistes who gained their repute and mass respect in India were served notices to vacate government accommodation in...

Why has the US put India on its currency watchlist?

For one more time, the United States has placed the Indian subcontinent in its monitoring list. This list contains all the countries with potentially...

Nike Japan’s advertisement highlighting discrimination faces public criticism

The last week of November this year saw controversy being generated around a video titled ‘The Future Isn’t Waiting’ released by Nike Japan. The...

Know how the pandemic fueled divorce rates around the world

Couples that have never discussed splitting up before the pandemic are now filing for divorce. The experiences are becoming more and more common, with...

Last week, the congress ruled state Rajasthan became another opposition ruled state, after Puducherry, to decide upon a special borrowing window. The funds that will be borrowed shall be used for meeting the state’s compensation shortfall under Goods and Services Tax, commonly abbreviated as GST.

Other states such as West Bengal, Chhattisgarh, Kerala, Punjab, Jharkhand, which dissented to the decision, are yet to join any of the borrowing options that were proposed by the central government in order to settle down the conflict regarding GST compensation deficit in the current financial year.

The dissenting states are holding dialogues at various levels says Finance Secretary Ajay Bhushan Pandey in an interview. He also mentioned that the NDA government at the centre has tried its best to devise strategies to be as accommodative as possible because both, the states and the Centre, are at the end of the day inter-dependent. For this purpose, the process of borrowing funds has been simplified to extraordinary levels and to make sure that the states are not being burdened, the interest rate is kept low.

What is this special window for borrowing that has been created by the central government?

The Finance Minister, Nirmala Sitharaman, last month made an announcement stating that the Centre would borrow funds from the market and acting as an intermediary it will arrange loans, one after the other, to pay the GST compensation shortfall to state governments. The quantum of the deficit is tantamount to Rs 1.1 lakh crore.

This will be shown as capital receipts for state governments and will not be reflected in the fiscal deficit of the Centre.

Opposition states like Kerala, Punjab and Chhattisgarh are not quite satisfied with this arrangement to pay the shortfalls and have insisted on further clarification. These states want a no-strings-attached borrowing mechanism. Moreover, under the ambit of the back-to-back loan mechanism, the states want inclusion of the balance compensation deficit amount beyond the proposed borrowing of Rs 1.10 lakh crore as well,

The total GST revenue shortfall was anticipated at Rs 3 lakh crore for the current fiscal year. Out of which, Rs 65,000 crore was the estimated compensation cess collection. All this calculation would have ultimately led to a compensation deficit of Rs 2.35 lakh crore, of which Rs 1.1 lakh crore has been estimated as a shortfall on account of GST implementation. The remaining amount has been estimated considered as a result of the coronavirus pandemic.

In the month of August, the Central government offered two options to the states:

  1. Borrow Rs 97,000 crore from a special window facilitated by the Reserve Bank of India.
  2. Borrow Rs 2.35 lakh crore from the market.

Both the options have been revised to Rs 1.10 lakh crore and Rs 1.8 lakh crore, respectively.

What is the problem that the states may face even after the Centre has enabled the borrowing?

The finance ministry had earlier laid down a proposal for a special window to be facilitated by the Reserve Bank of India along with the Central government. In this whole process, the states would have to tap the window individually. This birthed a concern that states, even if divided into groups, would have tapped the market for borrowing separately. This would ultimately lead to differential rates with a wide variance in interest rates between the states with more debt and those with less debt.

Furthermore, the yields for state development loans or SDLs are generally at a premium which is higher than the yield on the centre’s government securities. SDLs are used as a tool for market borrowing by states. Thus, borrowing of states would have been costlier in comparison to the Central government borrowing at a uniform rate and then transferring the borrowed amount to the states as a back-to-back loan. 

Has the scheme been pulled off by the Centre and the States?

As per the latest records, the Centre has already borrowed Rs 12,000 crore in two equal instalments under the special window. The centre has also further passed it on to 21 states as well as three Union Territories on October 23 and November 2. The first round of borrowing was done at 5.19% interest rate which is lower than the cost of borrowing for states. The second round was done at an interest of 4.42%.

Out of the Rs 12,000 crore distributed by the centre the states have received:

  1. Karnataka – Rs 1,872 crore
  2. Maharashtra – Rs 1,808 crore
  3. Gujarat – Rs 1,391 crore

In the first tranche of the borrowing, on October 23, the Central government borrowed and transferred Rs 6,000 crore to 16 states and two Union Territories. These receivers included Maharashtra, Bihar, Goa, Assam, Uttar Pradesh, Delhi, Gujarat, Karnataka, Himachal Pradesh, and Jammu & Kashmir.

Now, when Rajasthan has also given assent to participate in this arrangement, in total 22 states and three UTs have opted for the borrowing under the special window proposed by the Centre for filling up of Rs 1.83 lakh crore shortfall in GST revenue. The finance ministry has said that it will release Rs 6,000 crore to the states every seven days.

What will happen to the states which have not given their consent yet?

The Ministry is incessantly involved in deliberations and discussions with the opposing states to concede. According to expert economists, the deficit problem has been solved only for the current fiscal while this issue’s solution still remains uncertain for the next fiscal. They say that it must also be taken into consideration that tax revenues are expected to rise at a rate lower than the 14% growth. This quantum was guaranteed to states under the compensation mechanism of GST.

Devendra Kumar Pant, chief economist, India Ratings, also says that the bigger and more precarious question is about the future- What is going to happen in Financial Year 2022 and will the Finance Commission come out with some practical guidelines and plans such that cess collection is not sufficient for 14% compensation, instead of waiting till the end moment and swindling back and forth.

 

More articles

Leave a Reply

Latest article

The government sends notice to vacate houses to several eminent artistes including Pandit Birju Maharaj

Last month, a lot of eminent artistes who gained their repute and mass respect in India were served notices to vacate government accommodation in...

Why has the US put India on its currency watchlist?

For one more time, the United States has placed the Indian subcontinent in its monitoring list. This list contains all the countries with potentially...

Know how the pandemic fueled divorce rates around the world

Couples that have never discussed splitting up before the pandemic are now filing for divorce. The experiences are becoming more and more common, with...

Tracking the stock market movement

On Monday, the Indian stock market ended at an encouraging high remark with several green signals in pharma, banks, metals, and FMCG stocks. The...
%d bloggers like this: