GST compensation :Centre to borrow Rs 1.1 lakh crore and paas onto states

The Centre has offered a truce in the GST compensation matter by agreeing to borrow up to Rs 1.1 lakh crore, the estimated revenue shortfall on account of implementing goods and services tax (GST). The central government will lend to the states under a special window, following months of bitterness over the issue.This decision comes four days after the latest GST Council meeting ended in an impasse over the compensation mechanism proposed by the government earlier. Following hours of discussion, the dissenting states had declared that they were open to exploring legal options, including moving the Supreme Court.

Finance Minister Nirmala Sitharaman made the fresh announcement on Thursday. This is a positive development for many opposition-ruled states like Punjab, West Bengal and Chhattisgarh which had been nudging the Centre to borrow and fulfil the GST compensation commitment to states.“Under the special window, the estimated shortfall of Rs 1.1 trillion  will be borrowed by the Government of India in appropriate tranches. The amount so borrowed will be passed on to the states as a back-to-back loan in lieu of GST compensation cess releases,” Finance Minister Nirmala Sitharaman said in a statement. Reacting to the development, former finance minister P Chidambaram said in a tweet, "If the Centre has decided to borrow the Rs 1.1 trillion and extend it to the states as a back-to-loans, I welcome the change of position. I thank all the economists, academics and newspaper editors who had supported our position.”While this will not reflect in the Central government’s borrowing, it will show up in the states’ debt.

The finance ministry initiated the borrowing process for 21 states that had chosen to borrow up to Rs 1.1 lakh crore rupees. Under this option, the principal and interest will be repaid via compensation cess, which has now been extended beyond June 2022.The Centre said that this would further avoid differential rates of interest that individual states may be charged for their respective state development loans and would be an administratively easier arrangement.