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September 20, 2020

Finance Ministry says Borrowing of money to meet GST revenue shortfall

by facelesscompliance in Income Tax

Finance Ministry says Borrowing of money to meet GST revenue shortfall

As per provision in Sections 7, 8 & 10 of the GST (Compensation to States) Act, 2017, the issue of pending GST compensation and future course of action to meet the GST compensation shortfall has been discussed in 41st GST Council meeting on 27.08.2020 in the light of the opinion given by Ld. Attorney General of India, wherein States were given two options to meet their GST compensation shortfall for current FY from market borrowing. This was stated by Shri Anurag Singh Thakur, Union Minister of State for Finance & Corporate Affairs in a written reply to a question in Rajya Sabha today.

However, some States/UTs have suggested Central Government to borrow money from market and compensate States to meet GST revenue shortfall. In this regard, it is submitted that Central Government continues to remain engaged with the States who have not given either of the options, the Minister stated.

      Shri Thakur said that the details of the two borrowings options were communicated to the States by the Department of Expenditure as under: –

Option 1

  1. The shortfall arising out of GST implementation (calculated at Rs. 97,000 crores approximately) will be borrowed by States through issue of debt under a Special Window coordinated by the Ministry of Finance.
  2. It will be the endeavour to ensure steady flow of resources similar to the flow under GST compensation on a bi-monthly basis.
  3. The GOI will endeavour to keep the cost at or close to the G-sec yield, and in the event of the cost being higher, will bear the margin between G-secs and average of State Development Loan yields up to 0.5% (50 basis points) through a subsidy.
  4. A special borrowing permission will be given by the GOI under Article 293 for this amount, over and above any other borrowing ceilings eligible under any other normal or special permission notified by Department of Expenditure.
  5. In respect of Union Territories (including National Capital Territory), suitable arrangements to ensure flow of resources under the Special Window to them would be made by the Government of India
  6. 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. After the transition period, principal and interest will also be paid from proceeds of the Cess, by extending the Cess beyond the transition period for such period as may be required. The State will not be required to service the debt or to repay it from any other source.
  7. States will also be given permission to borrow the final instalment of 0.5% (originally intended as a bonus for completing at least three of the four specified reforms) allowed in para 4 of the Department of Expenditure’s OM F.No. 40(06)/PF-S/2017-18 dated 17-5-20 (hereinafter referred to as DOE OM) even without meeting the pre-conditions. This will enable borrowing of approximately Rs. 1 lakh crores in aggregate.
  8. The first instalment of 0.5% unconditional borrowing permission granted vide para 4 of the DOE OM remains unaffected. The reform-linked tranches specified in paras 5 to 8 of that OM also remain unaffected.
  9. In modification of para 9 of the DOE OM, States will be able to carry forward unutilised extra borrowing ceilings given under that OM to the next financial year; the instalments under para 4 (0.5 unconditional + another 0.5 as per para VII above) can be carried forward unconditionally; the reform-linked portions can be carried forward if the States meet the reform criteria within the dates already prescribed for this year.
  10. 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.
  11. The Compensation Cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the States. The first charge on the Compensation Cess each year would be the interest payable; the second charge would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the interest and principal are paid.

Option 2

  1. The entire shortfall of Rs 235,000 crores (including the Covid-impact portion) may be borrowed by States through issue of market debt. The GOI will issue an OM committing to repayment of principal on such debt from Cess proceeds as per para IV below.
  2. Appropriate enhanced special borrowing permission will be given by the GOI under Article 293 based on the following methodology, in modification of scheme notified earlier under the DOE OM:

a. Each state’s borrowing limits for the year will be based on the following calculation: Basic eligibility (3 % of GSDP) + Amount allowed for shortfall as per Item I above of Option 2+ up to 1% of GSDP (reform-linked as per paras 5 to 8 of DOE OM)

                                                          or

Basic eligibility (3% of GSDP) + 1% of GSDP + up to 1% of GSDP (reformlinked as per paras 5 to 8 of DOE OM) whichever is higher.

b. The additional unconditional borrowing limit of 0.5% and the final (bonus) tranche of 0.5% under para 4 of the DOE OM will not be separately available, being subsumed under the calculation above.

c. States will remain eligible for the reform-linked tranches of borrowing under paras 5 to 8 of the DOE OM this year but shall not be eligible to carry them forward. The maximum amount which can be availed under that OM shall stand reduced to 1% of GSDP instead of 2% of GSDP.

  1. The interest shall be paid by the States from their resources.
  2. The principal on the amount under Item I above will, after the transition period, be paid from proceeds of the Cess. The States will not be required to repay the principal from any other source.
  3. To the extent of the shortfall arising due to implementation of GST (i.e. Rs. 97,000 crores approximately in aggregate) the borrowing will not be treated as debt of the State for any norms which may be prescribed by the Finance Commission etc.
  4. The Compensation Cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the states. The first charge on the future Cess would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the principal is paid.

The Minister also stated that it was also decided that States will give their preference and views thereon. Thereafter on finalisation of scheme, the states can choose either Option 1 or Option 2 and accordingly their compensation, borrowing, repayment etc will be dealt as per their individual choice.

Abstract of the opinion of the Ld. Attorney General

Question. 1


In case the balance in the Goods and Services Tax Compensation Fund is not
adequate to meet the compensation payable under Section 7, are the States still entitled to receive the full amount of compensation calculated as per the provisions of the Goods and Services Tax (Compensation to States) Act, 2017?


Opinion- The States are entitled to receive the full amount of compensation during the “transition period”, in accordance with the provisions of the Act, irrespective of shortfall.


Question. 2

In case the balance in the Goods and Services Tax Compensation Fund is not
sufficient, is there an obligation on the Centre to meet the shortfall wholly or partly?


Opinion – There is no express provision in the Compensation Act for the Government of India to bear the liability of making good the shortfall.


Question. 3

What are the options before the GST Council, Union and States to meet the said shortfall? Can the GST Council recommend extension of period during which the compensation for the transition period can be paid to the States in terms of Section 8?


Opinion – Where, on account of extraordinary circumstance carrying steep fall in GST revenues and a shortfall in the Fund, the states cannot be paid full compensation during the transition period, the shortfall in the payment can be made up even after the transition period of 5 years consequent to a recommendation by GST Council extending the levy and collection of cess beyond 5 years under section 8(1) of the Act.


Question. 4

Can the States borrow on the strength of the future receipts from the Compensation Fund to meet the compensation gap either fully or partially?


Opinion – Clause (2) of Article 292 authorizes Parliament to make loans to a State, subject to any limit which may have been fixed by law made by Parliament. The entitlement of a State to borrow is set out in Article 293(1). The limitation on such right is found in Clause (3), which prohibits a State from raising any loan, without the consent of the Government of India, “if there is still outstanding any part of a loan which has been made to the State by the Government of India..”.


Question. 5

Can the GST Council recommend or request the Centre to consider allowing States to borrow money to meet the compensation gap either fully or partially?


Opinion- The GST Council can, in the exercise of its duties under article 279A(4)(h) of the Constitution, recommend to the Central Government to permit the States to borrow money, as a measure for meeting the compensation gap. It would, however, be for the Central Government to take final decision in the matter, in exercise of its authority under
article 293(3) of the Constitution.


Question. 6

Apart from aforesaid, opinion of Learned AG on following was also obtained: (i) Whether the States would be “entitled” to any compensation beyond the transition period of five years under the Goods and Services Tax (Compensation to States) Act, (ii) Whether, in light of the fact that GST Revenue would be down by Rs.2.5 lakh crore as compared to what it would have been without COVID and in such extraordinary circumstances when the entire world is facing an economic downturn due to the impact of Covid-19 on the economy and the amounts in the GST Compensation Fund is not adequate to pay the States, can it be and said that while the entitlement of the States to receive the full amount of compensation is payable for the “transition period”, however, the levy and collection of cess and payment of the shortfall compensation can be extended beyond 5 years in accordance with Section 8(1) of the Goods and Services Tax (Compensation to States) Act, 2017 and Article 279A of the Constitution? (iii) Whether, instead of taking consent of all States for the purpose of deferring the payment of the shortfall compensation under the Goods and Services Tax (Compensation to States) Act, 2017, the recommendation of the GST Council in the form of a decision of the majority of the Council as provided in Article 279A(9) of the Constitution would be sufficient to defer the payment of shortfall compensation in the extra-ordinary circumstances
such as the present?


Opinion – (i) The compensation under the Act is payable to the States during the transition period (i.e. 5 years); and (ii) Such payment shall be made from the Fund, into which the proceeds of the cess are credited.
(iii) GST Council would recommend the continuance of the cess beyond the transition period of 5 years only in a situation of shortfall during the transition period, which would necessitate the raising of funds for paying the compensation to the States after the 5 year period is over.
On account of any extraordinary circumstances causing a steep fall in GST revenues and a shortfall in the Fund, the states cannot be paid full compensation during the transition period, the shortfall in the payment of compensation could be made up even after the transition period of 5 years.
A recommendation by the GST Council extending the levy and collection of the cess beyond 5 years under Section 8(1) of the Act, would require a decision by a threefourth majority of the weighted votes

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