The central government clarified, on Saturday, that the special borrowing window will only be available to those states that opt to plug the compensation shortfall arising only because of GST implementation. Those states which opt to fill the full shortfall arising out of the combined effects of Covid-19 and GST implementation will have to borrow from the open market.
The government has given two options to the states - either to borrow for compensating the shortfall arising out of only GST implementation or compensate the full shortfall caused by the combined effects of the GST implementation and Covid-19.
The shortfall in case of the former is Rs 97,000 crore, while the shortfall for the combined effect of GST implementation and Covid-19 is Rs 2,35,000 crore.
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In a letter written to finance secretaries of the states and Union Territories, the finance ministry has also made it clear that both the principal and interest on the borrowed amount will be paid by the Centre from the compensation cess only if states opt for the first option. In the second option, the centre will only take guarantee of the principal amount and states will have to bear the interest cost.
Under the first option, where the special window is available, the government has said that it will keep the cost at or close to the G-sec yield, and in the event of the cost being higher, it will bear the margin between G-secs and average of State Development Loan yields up to 0.5% (50 basis points) through a subsidy.
The government will also try to ensure a steady flow of resources similar to the flow under GST compensation on a bi-monthly basis. Borrowing under the Special Window will not be treated as debt of the state for any norms which may be prescribed by the Finance Commission etc.
Under the second option, the entire shortfall of Rs 235,000 crore (including the Covid-impact portion) may be borrowed by states through issue of market debt. The Centre will repay the principal amount of such debt from the cess proceeds.
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The Centre will give appropriate enhanced special borrowing permission. The borrowing limit can be higher of the two: Basic eligibility (3 % of GSDP) + Amount allowed for shortfall + up to 1% of GSDP or Basic eligibility (3% of GSDP) + 1% of GSDP + up to 1% of GSDP.
Under the second option, to the extent of the shortfall arising due to implementation of GST (Rs. 97,000 crores approximately in aggregate), the borrowing will not be treated as debt of the state for any norms which may be prescribed by the Finance Commission etc.
The states can choose either of the two options. They will have to convey their choice at the next GST Council meeting, which is likely within a week.
Under the GST law, the Centre had promised the states to compensate any revenue loss due to implementation of GST for the first five years till June 2022. The compensation payable is the projected revenue (at a compound growth rate of 14% from the base figure of 2015-16) minus the actual revenue in each period
However, due to the new borrowing scheme the Compensation Cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the states. The first charge on the future Cess would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the principal is paid.
According to the finance ministry, the compensation gap this year could be Rs 2.35 lakh crore - compensation requirement this year could be as high as Rs 3 lakh crore against a likely compensation cess collection of Rs 65,000 crore. However, the government said that the gap of Rs 2.35 lakh is largely because of Covid-19 and if the gap due the pandemic is segregated then actual compensation gap due to GST implementation could be just Rs 97,000 crore.