Compensation payment has been a problem since August 2019 with GST collections faltering. In the current fiscal year, the states’ compensation requirement has been estimated at Rs 3 lakh crore, of which Rs 65,000 crore would be financed from revenue earned from tax collection. This leaves a deficit of Rs 2.35 crore lakh.
The Center has estimated that of this Rs 2.35 lakh crore, the compensation requirement of Rs 97,000 crore is due to the deployment of GST and the remainder is due to the impact of Covid-19 on the economy.
“The Government of India is committed to the implementation of the GST Act in letter and spirit, in letter by adhering to legal provisions and in spirit by honoring the commitment made by former President Shri Arun jaitley as for how to deal with the deficit, “said the official statement.
“In accordance with this commitment, certain borrowing options are presented. The government will support the extension of the Compensation Cessation for the period necessary to fully liquidate any compensation delay,” he added.
The statement also said that the Center’s revenues are under great pressure not only from the pandemic but also from national security. Therefore, it is in the collective interest of both the Center and the states, as well as the interest of the nation and all economic entities, not to make any avoidable debt at the central level when it could be done at the state level.
“Borrowing from states generally incurs a higher cost of interest than borrowing from the Center. The government of India is aware of this and has taken it into account, with a view to protecting states from are not adversely affected. ” the statement read.
These are the key details of the two options:
Option 1:
* The deficit arising from the implementation of the GST (estimated at approximately Rs 97,000 crore) will be borrowed by the States through the issuance of debt under a Special Window coordinated by the Ministry of Finance.
* It will be the effort to ensure a constant flow of resources similar to the low flow GST compensation Every two months.
* The government will endeavor to keep the cost at or close to the G-sec yield, and in case the cost is higher, it will assume the margin between the G-secs and the average yields of the state development loans up to 0.5% (50 basis points) through a grant.
* The government will grant a special indebtedness permit under Article 293 for this amount, in addition to any other maximum limit of indebtedness eligible under any other normal or special permit notified by the spending department.
* Interest on loans under the Special Window will be paid by Cess as they arise until the end of the transition period. After the transition period, principal and interest will also be paid from the proceeds of the Cess, extending the Cess beyond the transition period for as long as necessary. The state will not be obligated to pay the debt or pay it from any other source.
* Loans under the Special Window will not be treated as state debt by any rule that may be prescribed by the Finance Commission, etc.
Option 2:
* States can borrow the entire deficit of Rs 2.35,000 crore (including the part of the impact of Covid) by issuing market debt.
* The interests will be paid by the States with their resources.
* The principal over the indicated amount, after the transition period, will be paid with the income of the Cess. The states will not be obligated to repay the principal from any other source.
* To the extent of the deficit arising due to the implementation of GST (Rs 97,000 crores approximately in total), the indebtedness will not be treated as State debt by any rule that may be prescribed by the Finance Commission, etc.
* The Cess of compensation will continue after the transition period until all compensation arrears for the transition period are paid to the states. The first charge in the future Cess would be the repayment of the principal. The remaining compensation arrears accrued during the transition period would be paid after the principal is paid.
States can choose any of the options and give their preferences and opinions on the matter within seven business days.
Accordingly, a meeting of the state finance secretaries with the finance secretary and the union secretary (expenditures) was scheduled for September 1, 2020 to clarify the issues, if any, the finance ministry said in a Tweet.
States must communicate their preference within seven business days. Meeting of State Finance Secretaries with… https://t.co/1GXk6xF5bo
– Ministry of Finance (@FinMinIndia) 1598696952000
Both options will be available to states only for the current prosecutor. In April 2021, the Council will review and decide actions for the next year.
Stating that the Covid-19 pandemic is an “act of God”, Finance Minister Nirmala Sitharaman said the economy has been hit hard and will see a contraction in the current fiscal. Therefore, it was necessary to differentiate between the GST deficit and the pandemic-related deficit.
“This year we are faced with an extraordinary situation where even below 10 percent of the rough estimate, you are facing an ‘Act of God’ that could even result in a contraction of the economy …”, said Sitharaman after the 41st GST council met two days ago.
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