Centre releases 13th installment of GST compensation: A Sneak Peak

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The central government has recently released the 13th installment of Rs 6000 crore GST compensation to the state. The total compensation received so far by the states and the union territories amount to Rs. 78,000 crores of Rs. 1.1 lakh crore compensation.

The central government earlier had presented two schemes for the GST compensation. Option 1 entailed to the states selling debt securities in the market to raise the Rs 97,000 crore.  This was to be done through a special window that was to be monitored by the ministry of finance. The government endeavored to keep up the interest cost of these borrowing.

The second option entailed to the states selling their debt in the market to raise the entire Rs. 2.35 lakh crore shortfall. But the 2nd option had less favorable interest repayment clause for the states and hence many states opted for the former route.

Currently, 23 states have been compensated with Rs 5516.6 crore. The remaining Rs 483.4 crore has been released for union territories. the government states that “the remaining five states arunachal Pradesh, Mizoram, Manipur, Sikkim and Nagaland do not have a gap in revenue on account of GST implementation”.

In the current loan arrangement, the central banks borrow the funds under the special window and pass them on to the states. The interest rate for the current installment stood at 5.31%. The average rate of the total borrowing stands at an average of 4.75%.

Although under GST regime, a mechanism of compensation cess fund had been initiated. the Constitution (one hundred and first amendment) had made a provision to compensate states for any shortfall in GST collection for the next five years ending in 2022.

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As India had already been facing economic slowdown, the pandemic put another nail in the India’s economic coffin, sealing its fate. GST collection plummeted and the states pleaded the central government for compensation, as promised.

The GST shortfall estimation amounts to a mighty Rs. 3 lakh crores but unfortunately, the compensation cess fund had only Rs 65,000 to offer. This brought out the inefficiency of the system as the compensation cess fund is funded through a compensation cess that is levied on the so called “demerit goods”.

Addition to the GST compensation, Central government has also granted additional borrowing permission to the states that is equivalent to 0.50% of the Gross State Domestic Product.

Tamil Nadu in it’s open address to the government had reiterated that states had emphatically agreed to the implementation of unprecedented GST on the very basis of “unequivocal commitment given by the government of India to compensate the states for any revenue loss”. Moreover, the states had been reeling under the pressure of assuming the role of fighting the virus at the forefront to stop its spread so much so that it has led to acute revenue shortfall. Thus, the required relief and government support, if delayed, could derail government’s essential capital expenditure as the consumer demand is at all-time low.

The government stated that “all the states have been given their preference for Option 1. Permission for borrowing entire additional amount of Rs 1,06,830 crore (0.50% of GSDP) has been granted to 28 states under this provision”.

Thus, what the GST collection has to bring about in the future, is a question of contention and deliberation and we are yet to see.