GST COMPENSATION DUES!

As in the meeting which was held by the Ministry of Finance headed by Nirmala Sitharaman announced the two borrowing options for the state.They can borrow this money to make up for the Rs 2.35 lakh crore shortfall in GST.The states can borrow this money from the process of RBI or through raising money from market.

As we all know that GST compensation issue is from August 2019 because of faltering of GST.In the time of current fiscal,the compensation that is required by the states is estimated at Rs 3 lakh crore from which around Rs 65000 crore would be generated through levy cess.This brings money shortfall of around Rs 2.35 lakh core.As the centre calculated the total amount and bifurcated in two ways one is GST and second is Covid-19 pandemic so the amount comes is like from GST rollout is Rs 97000 crore and the remaining amount is due to Covid-19 impact.

The statement from the centre states that government revenues are in great strain not just due to pandemic but also because of national security.In this it is the collectible interest for both state and centre that if the borrowing can be done at state level than there is no need to come for borrowing to the centre due to such tough situation going in the economy.

Lets see what are the Two options that centre has formed:

Option 1:

If the shortfall arising out of GST implementation(calculated to around Rs 97000crore) will be borrowed by the state under a special window which will be created by ministry of finance.It will be steady flow of resources as per on bi-monthly basis.The centre will try to keep the cost at or around g-sec yield,and in the event of the cost being higher.Government will special permission to the state under Article 293 for this amount or any special permission granted.The interest on this will be paid through the cess as and when it arises.The borrowing under this window will not be treated as debt.

Option 2:

The entire shortfal of Rs 2.35 lakh crore(including the covid impact portion) can be borrowed in the form of market debt.In which interest will be paid through state resources.Principal amount shall be from proceeds of cess.The extent of the shortfall arising due to implementation of GST(Rs 97000 crore which is estimated) the borrowing will not be treated as a debt.The compensation cess will be continued after the transition period.The first charge on the future cess would be the principal payment.

So this are the two options basically.States can choose either of them and give their preference with in seven working days.Already a meeting of state finance secretaries has scheduled on 1st September 2020 with the union finance secretary to clarify the doubts.These options are available only for this fiscal year.In April 2021 the council will review and decide action for the next year.

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