The Center has demonstrated its arithmetic skills in the superiority game with the states over who pays the GST compensation deficit in this pandemic year. After several opposition states threatened to take the whole matter to court, the Center has come up with a plan that makes it appear that the Center is withdrawing from its previous combative position. But is not.
It has now agreed to borrow Rs 1.1 lakh crore and re-lend to state governments to compensate them for the loss of revenue arising from the implementation of the GST this year. Previously, state governments were required to borrow this amount on their own, under a special window created for them.
The interesting part is this: despite the apparent drop, the Center will manage to keep this increased debt out of calculating its own fiscal deficit and state governments will still be left with higher deficit figures. The only concession to the finances of state governments already stressed in this option will be lower interest rates, as the Center can make use of loans at lower interest rates than those of individual state governments.
And while the arithmetic for this loan program is skewed in favor of the Center, the decision could surely reduce the trust deficit with the states. The entire fight for GST compensation to the states emerged as Covid-19 and the resulting calm in economic activities has meant a drastic drop in overall GST collections.
An official statement on Thursday said that: “Under the special window, the estimated deficit of Rs 1.1 lakh crore (assuming all states join) will be provided by the Government of India in the appropriate tranches. The loaned amount will be transferred to the states as an attached loan in lieu of GST offset releases. This will have no impact on the Government of India’s fiscal deficit. The amounts will be reflected as the capital income of the state governments and as part of the financing of their respective fiscal deficits ”.
The Center also said that this plan will help states avoid differential interest rates and will also be an administratively easier arrangement. “It can also be clarified that the loans of the General Government (States + Center) will not increase in this step. States benefiting from the Special Window are likely to borrow considerably less from the GSDP’s 2% additional borrowing facility (3% to 5%) under the Aatma Nirbhar Package. “
DK Srivastava, EY’s senior policy advisor, said: “The only help for states with this plan will be that the amount will come to them at a somewhat lower interest rate.”
He said the government could have avoided complicating the matter. “The friendliest way would have been not to offer two options, but a direct option in which the entire GST deficit was divided into two equal parts: half to be loaned by the Center and to be loaned and the second half by the governments themselves state so that the burden would have been equally divided.
Sachin Menon, partner and national head (indirect tax) at KPMG, said the government’s statement has been quite confusing. “It is not clear how the Center’s position has changed from its previous position and the limit of Rs 1.1 lakh crore has already been announced.”
After the Center announced its withdrawal, Kerala Finance Minister Thomas Isaac increased the pressure demanding full compensation.
Provide the total compensation payment of ₹ 2.3 lakh crore this year. Given that under the new agreement, the additional loans do not affect the Center’s fiscal deficit, why should it hesitate to borrow Rs 1.7 lakh crore instead of the current supply of Rs 1.1 lakh crore?
– Thomas Isaac (@drthomasisaac) October 15, 2020
It also welcomed the government’s decision to borrow and re-lend rather than force state governments to borrow directly.
I welcome the new announcement that the Center will borrow through a special window and make consecutive loans to states in lieu of compensation, but there is a problem yet to be resolved: how much of the compensation will be deferred until 2023? Negotiate this point and reach a consensus.
– Thomas Isaac (@drthomasisaac) October 15, 2020
GST is a single indirect tax with multiple blocks for the entire country; It has subsumed central indirect taxes such as excise and customs taxes and state level levies such as value added taxes, sales taxes, luxury and octroi taxes, etc. All goods and services are divided into tax blocks and five categories of goods: soft drinks, masala bread, tobacco, automobiles and coal, attract an additional tax. The tax collected from the sale of these products is used to compensate the states for lost revenue.
At the time of the GST launch in July 2017, the Center had assured all states that it would compensate them for any losses arising due to the transition to GST over the next five years or until 2022. The compensation payable by the Center is the projected revenue (at a compound growth rate of 14% from the 2015-16 base figure) of the states for each year through 2022, minus actual revenue.
But this year, the collection of the offsetting tax has been estimated at roughly Rs 70,000 crore, leaving a huge hole of Rs 2.3 lakh crore. This is the sum for which the Center and the states are engaged in a tug of war.
Previously, the Center had put two options on the table for state government.
First option: States will borrow the deficit of Rs 1.1 million lakh arising from the implementation of the GST by issuing debt under a special window coordinated by the finance ministry. This Rs 1.1 lakh crore is the estimated deficit due to fair implementation of the GST and without the impact of the pandemic.
The Center had said that the interest on these loans will be paid out of the tax (which will now be collected after 2022) and that state governments will not be required to pay the debt or pay it from any other source.
Second option: States can borrow the total deficit of Rs 2.35 lakh crore (including the part affected by Covid) by issuing market debt. The Center will repay the principal of said debt with the future proceeds of transfers. But state governments will have to bear the burden of interest on such loans.
The Center’s decision to borrow and re-lend to states should boost state confidence in the federal framework in an otherwise difficult year.
.
