GST Council meet: Govt to borrow Rs 1.58 trn for compensation shortfall

The Centre on Friday proposed market borrowing to the tune of Rs 1.58 trillion to compensate states for the goods and services tax shortfall through back-to-back loans, like last year. But several states expressed discontent, calling it “gross underestimation” of projected revenue losses.

States’ demand for the extension of the compensation period beyond June 2022 will be taken up in a separate meeting.

The Centre has pegged the GST compensation requirement at Rs 2.7 trillion for FY22, of which Rs 1.1 trillion is expected to be met through cess collection. Like last year, revenue growth of 7 per cent has been assumed to forecast the shortfall and borrowing requirement.

The cess collection is expected to be inadequate in FY22 with the Covid-19 pandemic disrupting the economy for the second year.

“The assumption of 7 per cent growth in revenues is itself wrong. Last year, 10 months saw growth of -3 per cent, instead of 7 per cent, on the basis of which Rs 1.1. trillion borrowing was done. The government must compensate us for that, too,” said a key state finance minister.

On the extension of the compensation period, Finance Minister Nirmala Sitharaman said: “We are in the last of the 5 years of 14 per cent compensation-protected revenue arrangement. I have assured the members that we'll hold a special Council meeting, exclusively on a single-point agenda of how compensation cess be collected, how long and how much beyond July 2022.”

The Centre is expecting GST collection to fall to below the Rs 1-trillion mark in June, as indicated by the slowdown in e-Way bill generation in May.

States were promised compensation for five years after GST implementation in July 2017 for revenue shortfall, assuming 14 per cent annual growth, since states lost autonomy over indirect taxes. Compensation cess is levied on a few items in the 28 per cent GST slab, such as automobiles, cigarettes, and aerated drinks.  

Punjab Finance Minister Manpreet Singh Badal pointed out: “We need to calculate compensation in the manner prescribed in Section 7 of the GST compensation Act. Anything done otherwise is arbitrary. We cannot apply 7 per cent compounding on an already arbitrary rate of growth of the previous year to calculate the actual revenue.”

While the Budget 2021-22 has estimated GST revenues to grow 17 per cent over last year, the target appears challenging given how localised lockdowns across the country have impacted supplies.

Chhattisgarh Health Minister T S Singh Deo, who represents the state in the Council, said that most states were unhappy with the compensation projection this year. “How can 7 per cent become a precedent, every time there is a shortfall?”

Last year, the Centre had estimated a cess shortfall of Rs 2.35 trillion for 2020-21, of which Rs 1.1 trillion attributed to GST implementation was met by borrowing. Another Rs 70,000 crore came via cess collection, leaving a gap of around Rs 50,000 crore (attributed to Covid-19), which will be paid to the states in due course. Rs  1.1 trillion was borrowed by the Centre and passed on to the states as back to back loans.

The Centre had proposed two options to the states to address the compensation cess shortfall. First, borrowing Rs 1.1 trillion where the interest cost will be paid off through the extended cess period, or borrowing full Rs 2.35 trillion where cess will be used for paying only the principal, not the interest. Under the first option, the states were additionally allowed to borrow by 0.5 per cent of their respective economic size from markets.