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Focus: GS-III Indian Economy

Why in news?

The Centre acknowledged that States are likely to face a GST revenue gap of Rs. 3 lakh crore this year, as the economy may contract due to COVID-19.


  • At the GST Council meeting, the Centre distinguished between the shortfall due to GST implementation itself — claiming that this is the portion “hardwired” into the compensation law — and that caused by the impact of COVID-19.
  • Alleging a “trust deficit” between the Centre and States, they asked why the former could not borrow money to compensate the States, adding that the proposed solution of borrowing by States should not be forced on them.
  • That law 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.
  • However, the economic slowdown has pushed both GST and cess collections down over the last year, resulting in a 40% gap last year between the compensation paid and cess collected.

The 2 options presented to the council

  • A special window could be provided, in consultation with the RBI, so that the States can get this Rs. 97,000 (out of the 2.35 lakh crore States’ GST revenue gap in 2020-21 due to GST implementation ONLY and nothing else) crore at a reasonable rate of interest, and this amount can be repaid after five years through the collection of cess.
  • This entire gap of Rs. 2.35 lakh crore can be met by the borrowing by the States. There also, arrangement could be made with the RBI and certain facilities could be provided.
  • States have asked for seven working days to consider the detailed proposals.

-Source: The Hindu

December 2023