Focus: GS-III Indian Economy
Why in news?
- The Centre wrote to States suggesting options of borrowing money to make up the ₹2.35 lakh crore shortfall in GST revenues expected in the ongoing fiscal.
- Kerala has rejected the two options for Goods and Services Tax (GST) compensation mooted by the Centre at the 41st GST Council meeting.
Details of the Central Government’s options
- Under the two options put forward at the Council meeting, the first was a special window for States, in consultation with the RBI, to borrow [collectively] ₹97,000 crore at a reasonable interest rate.
- The second option was to borrow the entire ₹2.35 lakh crore shortfall under the special window.
- Compensation payment has been an issue since August 2019 with GST collections faltering.
- In the current fiscal, the compensation requirement of States has been estimated at ₹3 lakh crore, of which ₹65,000 crore would be funded from the revenues garnered by levy of cess.
The reasoning given by the Central Govt.
- “The wording of the Constitution and statutory preamble make it clear that the spirit of the law is not to compensate States for all types of revenue losses, but rather for that loss arising from GST implementation.”
- The Centre has reasoned that it is already saddled with a large borrowing requirement, given the slowdown in revenue collections due to a slump in the economy.
- While additional borrowing by the Centre influenced yields on Central Government securities (G-secs) and has other macro-economic repercussions, yields on State securities do not directly influence other yields and do not have the same repercussions.
- Hence, it is in the collective interest of Centre and States and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the Central level when it could be done at the State level.
Special Window to borrow
- The interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period; the State will not be required to service the debt or to repay it from any other source.
- The borrowing under the special window will not be treated as debt of the State for any norms which may be prescribed by the Finance Commission etc.
Rejection of the 2 options by some states
- States such as Punjab, Kerala, Delhi and West Bengal have already stated that raising debt is not an option for the already stretched State finances.
- Kerala has asked the Centre to take a loan and provide compensation to the States.
- As per the Constitution, a State needs permission from the Centre to take a loan and the interest will be 1-2% more if the State avails the loan.
- Only 3% of the State’s income can be availed as loan even if permission is granted.
- Even if the fiscal limit ceiling is enhanced by 0.5%, as suggested by the Centre, it will not be adequate for Kerala as it will not be enough to cover the GST compensation.
-Source: The Hindu