NRI Dunia
Think Outside The Box

Centre to borrow on behalf of states to meet GST shortfall

The Central government will borrow up to Rs 1.1 lakh crore on behalf of the states to bridge the shortfall in GST collections, the Finance Ministry said on Thursday.

A slowdown in the economy since last fiscal has resulted in a drop in the Goods and Services Tax (GST) collections, upsetting the budgets of states which had given up their right to levy local taxes such as sales tax or VAT when GST was introduced in July 2017.

To make up for the shortfall, borrowing from the market was proposed.

In a statement, the Union Finance Ministry said states were offered a special window to borrow Rs 1.1 lakh crore over and above their existing limits, to bridge the shortfall.

“Under the Special Window, the estimated shortfall of Rs 1.1 lakh crore (assuming all States join) will be borrowed by Government of India in appropriate tranches,” the statement said. “The amount so borrowed will be passed on to the States as a back-to-back loan in lieu of GST Compensation Cess releases.”

The release, however, did not say who will service the interest and principal payments.

The Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.

The borrowing, the statement said, “will not have any impact on the fiscal deficit of the Government of India”.

“The amounts will be reflected as the capital receipts of the State Governments and as part of the financing of its respective fiscal deficits,” it said.

Borrowing of the shortfall by the Centre will avoid differential rates of interest that individual states may be charged and will be an administratively easier arrangement, it added.

“It may also be clarified that the General Government (States+Centre) borrowings will not increase by this step,” it said. “The States that get the benefit from the Special Window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2 per cent of GSDP (from 3 per cent to 5 per cent) under the Aatma Nirbhar Package.”