Details of borrowing options to meet GST compensation requirement for 2020-21 communicated to states by Finance Ministry

New Delhi [India], Aug 29 : The two borrowing options to meet the Goods and Services Tax (GST) compensation requirement for 2020-21 consequent to the discussions in the 41st meeting of the GST Council held on August 27 has been communicated to states which could, in turn, communicate their preference within seven working days, the Finance Ministry said on Saturday.
A meeting of State Finance Secretaries with the Union Finance Secretary and Secretary (Expenditure) is scheduled to be held on September 1, 2020, for clarifying issues, if any.
The first option provides a special window to states in consultation with the Reserve Bank of India (RBI) to provide Rs 97,000 crore at a reasonable rate of interest. This money can then be repaid after five years from the collection of cess.
The second option is that the entire GST compensation gap of Rs 2.35 lakh of this year can be met by states in consultation with the RBI.
"Two options were placed before states. We told them that we will facilitate talking with RBI and help to get G-security linked interest rates so that each state does not have to struggle for loans," the Finance Minister Nirmala Sitharaman had said at the meeting of 41st GST Council on August 27.
These options will be available only for this year. In April 2021, the Council will review and decide action for the fifth year.
According to a Ministry of Finance release, under the first option the government of India will strive to keep the cost at or close to the G-sec yield, and in the event of the cost being higher, will bear the margin between G-secs and average of State Development Loan yields up to 0.5 per cent (50 basis points) through a subsidy.
Special borrowing permission will be given by the centre under Article 293 for this amount, over and above any other borrowing ceilings eligible under any other normal or special permission notified by the Department of Expenditure. The borrowing under the Special Window will not be treated as a debt of the State for any norms which may be prescribed by the Finance Commission etc, the MoF added.
The Ministry of Finance further said: "Under option two, the entire shortfall of Rs 235,000 crores (including the COVID-impact portion) may be borrowed by states through the issue of market debt. The centre will issue an OM committing to the repayment of principal on such debt from Cess proceeds."
"The states will not be required to repay the principal from any other source. 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 a debt of the state for any norms which may be prescribed by the Finance Commission, etc," it added.
The annual GST compensation requirement is estimated to be about Rs 3 lakh crore and cess collection is expected to be around Rs 65,000 crore, leaving the Centre with an annual compensation gap of Rs 2.35 lakh crore.