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GST Compensation: Centre to Borrow on Behalf of States

  • 16 Oct 2020
  • 6 min read

Why in News

Recently, the Centre has decided to borrow an estimated revenue shortfall of Rs. 1.1 lakh crore as loans to States to meet the Goods and Services Tax (GST) shortfall.

Key Points

  • Borrowing:
    • The borrowing will not have any impact on the fiscal deficit of the Government of India as the Centre is acting as mediator only. The Centre is borrowing the loan and passing that on to the states.
    • The amounts will be reflected as the capital receipts of the state governments and as part of financing of its respective fiscal deficits.
  • Background:
    • The economic slowdown had reduced both GST and cess collections in FY 2019-20, resulting in a 40% gap (shortfall) between the compensation paid and cess collected.
    • The state’s GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore.
    • The Centre distinguished the GST shortfall into two types:
      • Due to GST implementation itself.
      • Caused by the impact of Covid-19.
    • The Finance Minister termed the fall of GST revenue due to Covid-19 as an act of God. However, the GST Compensation Act, 2017 did not foresee an act of God.
      • The GST Compensation Act, 2017 guaranteed states that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
    • The Centre has been at loggerheads with many states over the compensation issue due to GST shortfall. In August 2020 at GST Council meet, the Centre had proposed two options to states to meet the shortfall:
      • A special window could be provided, in consultation with the Reserve Bank of India (RBI), so that the states can get Rs. 97,000 crore at a reasonable rate of interest, the amount can be repaid after five years (of GST implementation) ending 2022 from cess collection.
      • Another option is that this entire gap of Rs. 2.35 lakh crore can be met by the borrowing by the states in consultation with RBI.
    • However, many states were against these two options and were planning to move the Supreme Court over the issue.
  • Benefits:
    • The borrowing by the Centre would avoid differential rates of interest that individual states may be charged for their respective State Development Loans (SDLs) and would be an administratively easier arrangement.
    • The country’s general government debt, which includes both the Centre’s and States’ borrowings will not increase due to this step.
    • 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% of Gross State Domestic Product under Atma Nirbhar Package.
      • The borrowing limits of state governments was increased from 3% to 5% of GSDP for the year 2020-21 under Atma Nirbhar Package.

Goods and Services Tax

  • GST was introduced through the 101st Constitution Amendment Act, 2016.
  • It is an indirect tax levied on the supply of final goods and services. The GST has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
  • It is essentially a consumption tax and is levied at the final consumption point.
  • It is levied only on the value addition and is collected on goods and services at each point of sale in the supply line.
  • The GST that a merchant pays to procure goods or services (i.e. on inputs) can be set off later against the tax applicable on supply of final goods and services. The set off tax is called input tax credit.
  • The GST avoids the cascading effect or tax on tax which increases the tax burden on the end consumer.
  • Tax Structure under GST:
    • Central GST to cover Excise duty, Service tax etc, State GST to cover VAT, luxury tax etc.
    • Integrated GST to cover inter-state trade.
      • IGST per se is not a tax but a system to coordinate state and union taxes.
    • It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.

Source: TH

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