GST Council Meeting: Centre Proposes Rs 1.58 Lakh Crore Borrowing To Fund Cess Gap 

The central government has proposed to borrow Rs 1.58 lakh crore to fund the shortfall in cess collections needed to compensate states under the Goods and Services Tax agreement.

Last year, a shortfall of Rs 2.35 lakh crore emerged in the collections of compensation cess vis-a-vis the compensation needed. The central government made up the shortfall by extending loans of Rs 1.1 lakh crore to states. It funded only part of the shortfall, arguing the rest was on account of an unprecedented event (pandemic) that it was not liable to recompense. The remaining approx. Rs 1.25 lakh crore compensation to states is to be funded by an extension in the cess levy beyond June 2022.

Similar to last year, the Government of India will borrow from the market in appropriate tranches and pass on the funds to state governments as back-to-back loans in lieu of GST compensation cess.

The borrowing will be repaid via cess collections over the coming years. The GST Council has already agreed to extend the levy of compensation cess beyond the transition period of five years to such period as may be required to meet the gap in compensation cess collections.

The borrowing under the special window will not have any bearing on the Centre's fiscal deficit, but will reflect as capital receipts in state budgets.

Chhattisgarh Finance Minister TS Singh Deo said some states objected to the projections given by the central government on the cess shortfall seen in the current fiscal. In the GST Council meeting, Chhattisgarh demanded that the cess shortfall estimate should be based on the promised 14% compounded growth in states’ GST revenue every year.

Each state gave their respective estimates of the cess shortfall for the year. There was no decision on the proposal and it was left open, Deo said.

Punjab Finance Minister Manpreet Singh Badal also said that many states argued that the cess shortfall should be given in the form of a grant and the entire gap should be compensated.

The shortfall in GST compensation has been a thorny issue between the Centre and states since last fiscal.

The GST Constitutional amendment assured states of compensation for loss of revenue for five years (2017-2022), as state levies were subsumed under the common national tax. A subsequent law mandated a 14% compounded growth in states’ GST revenue every year till 2022. A cess was imposed on sin goods to fund this revenue assurance.

The government is likely to further discuss the proposal to fund the compensation cess shortfall for the year in a separate meeting of the GST Council. That meeting will also discuss the issue of extending the period of compensation under the Goods and Services Tax regime.

In a media briefing after the GST Council meeting, the finance minister said, “I’ve assured the members there will be a special session only to discuss that one agenda...”. This will be held soon, she said, to discuss all matters regarding compensation period and compensation cess.