The borrowing, said a statement from the Ministry of Finance, “will have no impact on the fiscal deficit of the Government of India.”
The central government will borrow up to Rs 1.10 lakh crore on behalf of states to cover the shortfall in GST collections, the Finance Ministry said on Thursday.
A slowdown in the economy since last fiscal year has resulted in a drop in the collections of the Goods and Services Tax (GST), altering the budgets of states that had waived their right to collect local taxes such as sales tax. or VAT when the GST was introduced in July 2017. To make up the shortfall, he set out to borrow from the market.
In a statement, the Union Finance Ministry said states were offered a special window to borrow Rs 1.10 lakh crore above their existing limits, to cover the deficit. “Under the special window, the estimated deficit of Rs 1.10 lakh crore (assuming all states join) will be provided by the Government of India in the appropriate tranches,” the statement said.
“The amount thus loaned will be passed on to the states as a back-to-back loan in lieu of GST offsetting tax breaks,” he added. The Indian Government’s loans will ensure uniformity in bond auction performance and spacing, a senior Finance Ministry official said.
However, principal and interest payments will be made by the compensation group. The fundraising of Rs 1.10 crore lakh will be carried out through the issuance of bonds with a term of three to four years, the official added.
Borrowing from the central government on behalf of the states is likely to ensure that a flat rate of borrowing is charged and this too would be easy to manage.
The borrowing, the statement said, “will have no impact on the government of India’s fiscal deficit.”
“The amounts will be reflected as the capital inflows of state governments and as part of the financing of their respective fiscal deficits,” he said.
It can also be clarified that loans from the general government (States + Center) will not increase in this step, he said.
“States benefiting from the special window are likely to borrow considerably less from the GSDP 2% additional borrowing facility (3% to 5%) under the Aatmanirbhar Package,” the statement read.
According to market sources, since different states obtained different types of loans to cover the GST compensation deficit, they approached the Center to fix them at a uniform rate.
When the GST was introduced in July 2017, states were promised a revenue increase of 14% over their last tax revenue in the first five years of the GST launch. This was to be done through a tax or surcharge on luxury goods and sin, but collections in this regard have fallen short with the slowdown in the economy since the last fiscal year.
To make up the shortfall, the Center suggested that states can borrow against future offset receipts.
Earlier this week, the Finance Ministry had declared that 21 states had accepted one of the two loan options suggested by the Center. The loan options, however, were not acceptable to non-BJP states.
Interest on the amount loaned would be the first charge of the tax, which is collected beyond five years. The next charge would be 50% of the principal amount borrowed, that is, Rs 1.10 lakh crore, and then the remaining 50% would be for compensation affected by the coronavirus pandemic.
Under the terms of Option-1, in addition to obtaining the facility of a special loan window to cover the income shortfall, states are also entitled to obtain unconditional permission to borrow the last 0.50% installment of the GSDP 2% additional loans allowed. by the Government of India under the Aatmanirbhar Abhiyaan on May 17, 2020.
Earlier this week, the Center allowed 21 states opting for Option 1 to borrow an additional Rs 78,452 crore together through the open market.
The loan permit issued to the 21 states exceeds the loan permit of around Rs 1.10 lakh crore that will be issued to allow the states to cover the revenue shortfall arising from the implementation of the GST, according to the statement. The finance ministry is creating a special window to facilitate this debt, he added.
The current additional indebtedness permit has been granted at a rate of 0.50% of the State’s Gross Domestic Product (GSDP) to those states that have opted for Option 1 of the two options suggested by the Ministry of Finance.
Under the GST structure, taxes are collected below 5, 12, 18 and 28% of slabs. In addition to the higher tax slab, a luxury property, sin and demerit tax is levied and the proceeds from these are used to compensate the states for any loss of income.
The surcharge on cars and other luxury items and tobacco products ranges from 12% to 200% in addition to the higher GST rate of 28%. It was due to expire in June 2022.
This has now been extended beyond 2022.
Paying GST compensation to states became a problem after revenue from the imposition of the fee began to decline since August 2019.
The Center had to use the excess of the amount collected during 2017-18 and 2018-19. The Center had released more than 1.65 lakh crore rupees in 2019-20 as GST compensation. However, the amount of taxes collected during the period 2019-20 was Rs 95,444 crore. The compensation payment amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18.
During the current prosecutor’s April-July, the total compensation owed to the states stood at more than Rs 1.51 lakh crore.
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