India Said To Raise Borrowing For States Under Special Window To Meet GST Shortfall

The central government raised the borrowing permitted under a special window to finance a shortfall in compensation cess for the current fiscal after some states highlighted incorrect GST revenue growth estimates, according to two officials aware of the matter.

Higher growth projections for states led to a lower compensation outgo of Rs 97,000 crore, excluding the Covid-19 impact, the officials told BloombergQuint on the condition of anonymity. The centre has revised the compensation amount that states can raise through the special liquidity window to Rs 1.1 lakh crore, they said.

In the last GST Council meeting on Aug. 27, the central government had estimated the shortfall in compensation cess under the goods and services tax regime at Rs 2.35 lakh crore for the financial year ending March 2021. Of this, Finance Minister Nirmala Sitharaman had said only Rs 97,000 crore was on account of GST implementation and the rest due to the Covid-19 pandemic.

The centre then proposed two options to states to resolve the issue of the compensation cess shortfall. First, borrow Rs 97,000 crore via the special window coordinated by the Finance Ministry, after which states will have no debt servicing liability. And second, borrow the entire Rs 2.35 lakh crore from the market, but states will have to service the interest on this debt from their own resources.

Growth projected while calculating the first borrowing option has been reduced to 7% for last two fiscals against assumed growth of 10%, the officials quoted above said. That led to an increase in GST compensation to Rs 1.1 lakh crore. The 10% growth in post-settlement GST revenue, according to a government statement, was estimated assuming no impact of the pandemic.

Goa, Gujarat, Meghalaya, Tripura and Madhya Pradesh—the states ruled by the Bhartiya Janta Party and its allies—pointed out lower growth in state GST revenues at 6-7% in 2018-19 and 2019-20, the second official said.

Though Tripura and Goa have opted for the first borrowing option, they suggested the central government to reconsider its stand and explore the feasibility of GST Council or itself to borrow to meet the shortfall, the second official quoted above said. Besides, Goa said the compensation to states should not be limited only to the amount due on account of implementation of the GST, but also the pandemic’s impact.

As many as 21 states and union territories had opted for the first borrowing plan to cover the shortfall in payment of GST compensation cess, BloombergQuint had reported last month.

BloombergQuint’s email sent to the Finance Ministry remained unanswered.

GST Council Meet

The GST Council is set to meet on Oct 5. It’s expected to consider a ministerial panel’s suggestion that the central government should disburse Rs 24,400-crore integrated GST due to states and union territories for the period July 2017-March 31, 2018, the two officials quoted above said.

It may also consider lowering the rate on ‘Ayurvedic’ hand sanitisers to 18% from 12%, and allowing GST payment through UPI and IMPS.

The GST fitment committee, tasked with GST rate adjustments, however, is not in favour of lowering tax rate on ‘Ayurvedic’ sanitisers, and distinguishing it from alcohol-based sanitisers taxed at 18% due to classification issues. But the issue will still be placed in front of the GST Council based on Haryana High Court’s observation in a petition filed by Haryana Ayurvedic Drugs Manufacturers Association.

The council is also expected to exempt launch of satellite services supplied by ISRO, Antrix Corp., and New Space India Ltd. from the GST. The supply of satellite launch services by ISRO, Antrix or NSIL to a person located in India is taxable at 18%, which has led to Indian startups choosing to launch satellites through Russian space company, the second official said.

Besides, the council is expected to consider allowing Goods and Services Tax Network — the firm which is building the information technology backbone of the GST regime—to provide UPI and IMPS as an option for tax payments on the GST portal based on a request by National Payments Corporation of India.