The state governments of West Bengal and Kerala, which have been at loggerheads with the Centre more than how to compensate the states for their GST income shortfall in FY21, offered the paucity of the designated cess funds, also have accepted Option-1 mooted by the latter to meet the shortfall.
With this, 25 states and all 3 UTs with legislature — Delhi, J&K and Puducherry — have come to accept the Option-1.
Under the mechanism, the Centre envisages to borrow a total of Rs 1.1 lakh crore through a particular RBI window and transfer the funds to states as back-to-back loans sans any consequent fiscal effect on states.
Between them, West Bengal and Kerala will get Rs ten,197 crore below the particular window. Further, the Centre has granted further borrowing permission of Rs four,522 crore to Kerala (.five% of GSDP) and Rs six,787 crore to West Bengal. The nod for further borrowings is meant to be an incentive for states picking out the particular window.
While there was just about a vertical division in the GST Council more than the vexed compensation concern, the Centre ultimately managed to placate the states by agreeing to borrow (its initial stance was to make the states themselves borrow below a low-expense window facilitated by it).
The Centre has borrowed Rs 24,000 crore on behalf of the states in 4 instalments so far and passed it on to the eligible states and UTs.
The GST Council had estimated that against the total estimated shortfall (due to GST implementation and the pandemic) of Rs two.35 lakh crore, some Rs 1.83 lakh would have been payable this year below standard course, and the rest only subsequent year. Under GST Compensation Act 2017, the states are assured a 14% annual development in the relevant tax revenues more than the 5 years by means of June 2022. The Council has currently decided to extend the cess beyond June 2022 to mobilise sources for financing the particular window.
Telangana and Rajasthan had been the two states that climbed aboard the Option 1 bandwagon, just prior to West Bengal and Kerala.
The states which have opted for Option-1 so far are – Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Rajasthan, Sikkim, Telangana, Tripura, Tamil Nadu, Uttar Pradesh, and Uttarakhand and West Bengal, along with the 3 Union Territories of Delhi, Jammu & Kashmir and Puducherry. Jharkhand and Chhattisgarh are however to accept the Option 1.
In a current letter to Union finance minister Nirmala Sitharaman, West Bengal finance minister Amit Mitra has urged the Centre to borrow an further Rs 72,000 crore below the particular window to make superior the states’ estimated GST income shortfall in FY21, in addition to Rs 1.1 lakh crore.
Mitra pointed out that the Centre has been in a position to borrow the initial compensation funds from the particular window of RBI at a low price of five%, whereas the interest price paid by the states for competitively borrowing from RBI auctions is as higher as six.eight%. He also noted that the Centre “will neither have the burden of additional fiscal deficit nor the burden of debt servicing”.