Borrowing options to meet the GST Compensation requirement for 2020-21
GST
Dated:- 29-8-2020
The two borrowing options to meet the GST Compensation requirement for 2020-21 consequent to the discussions in the 41st meeting of the GST Council held on 27th August, 2020 has been communicated to States, as per the document attached with this press note, to communicate their preference within seven working days. A meeting of State Finance Secretaries with the Union Finance Secretary and Secretary (Expenditure) is scheduled to be held on 1st September, 2020 for clarifying issues, if any.
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Document 1
GST COMPENSATION OPTIONS
This paper describes the two options mentioned at the GST Council
meeting on 27th August 2020, with a view to enabling the States to give their
preference and views thereon within seven working days. Certain background
information as furnished in the Council meeting is appended in Annex 1.
After the scheme is finalized, the states c
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t Amendment) Act, 2016 (emphasis added).
The said Act provides in Section 7 the detailed mechanism for calculation
and payment of compensation to the States. In essence, the compensation
payable is the projected revenue (at a compound growth rate of 14% from the
base figure of 2015-16) minus the actual revenue in each period.
The Constitution and the preamble to the Act lay out the spirit and
purpose of the GST compensation: namely that it is to compensate states for
loss of revenue “arising on account of implementation of GST”. The wording
of the Constitutionand statutory preamble make it clear that the spirit of the
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law is not to compensate states for all types of revenue losses, but rather for
that loss arising from GST implementation.
This year the Indian economy, nay the global economy, is suffering from
an exogenous shock, namely the Covid-19 pandemic, whose scope and scale is
unprecedented in history.
Parliament obviously could not have contemplated
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pensation payable under
Section 7 “shall be paid out of the Fund”.
It has been clarified by the Attorney General that the Act does not
require the Government of India to bear the liability of making good the
shortfall and that it is the GST Council which has to decide on making good the
shortfall.
In short the correct legal position is that:
(i)
The states are entitled to compensation as per the method provided
in Section 7 for the transition period, regardless of the cause of the
shortfall
(ii)
(iii)
However, compensation is to be paid only from the Compensation
Fund and it is not an obligation of the Government of India in the
event of a shortfall
It is for the GST Council to decide on the mode of making good the
shortfall.
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(iv)
To the extent the shortfall is not made good, the States would still be
eligible to get it in arrears after the transition period through
extension of the Cess, if so decided by the Council.
EARLIER DISCUSSIONS ON RESPONSIBILITY FOR S
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enues of the
Central Government, which would be a challenge as the Central Government also had
its own committed expenditure. He said that based on these considerations, certain
principles had been agreed upon, namely that the compensation would be funded
out of the cess mechanism, which would have a pool of revenue and if there was any
shortfall in this pool, it could be supplemented by some mechanism that the Council
might decide”[Para 21].
Therefore, it is very clear from the deliberations of the Council that the
compensation had to be paid out of the Compensation Fund and not the
Consolidated Fund of India. This issue was again raised in the 8th meeting held
on 3-4 January, 2017, wherein the Chairperson stated that
“…..in case the amount in the GST Compensation Fund fell short of the
compensation payable in any bimonthly period, the GST Council shall decide the
mode of raising additional resources including borrowing from the market which
could be repaid by collecti
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ition as set out above regarding the role of the
Government of India is not a new or fanciful interpretation of
the law. It is the correct and proper interpretation which was
thoroughly discussed in the GST Council and in Parliament
before the relevant legislation was passed.
The Government of India is committed to implementation of
the Act in letter and in spirit-in letter by adhering to the
legal provisions and in spirit by honouring the commitment
made by the former Chairperson in regard to the manner of
meeting the shortfall. In accordance with this commitment,
certain options for borrowing are presented here. The
Government of India will support extension of the
Compensation Cess for such period as may be necessary to
completely discharge any arrears of compensation.
Ways of Meeting the Shortfall:
The prevailing economic situation is such that Central revenues are
under greater strain than GST revenue. While indirect taxes are linked to
transactions, and recover i
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and has other macro-economic repercussions.
The yield on G-secs acts as a benchmark for State borrowing as well as private
sector borrowing. Hence any rise in Central borrowing costs ipso facto drives
up borrowing costs for all borrowers, including not only the States but also the
entire private sector.
On the other hand, the yields on State Government securities do not
directly influence other yields and do not have the same type of macro-
economic 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.
Borrowing by states typically incurs a higher interest cost than
borrowing by the Centre. The Government of India is conscious of this and
has factored this below, with a view to protecting the states so that they are
not adversely affected.
I.
II.
Option 1
The
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Window to them would be made by the Government of India
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, principaland 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.
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.
The first instalment of 0.5% unconditional borrowing permission granted
vide para 4 of the DOE
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repayment. The remaining arrears of compensation accrued
during the transition period would be paid after the interest and
principal are paid.
I.
II.
III.
Option 2
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.
Appropriateenhanced 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 allowedfor shortfall
as per Item I above of Option 2+ up to 1% of GSDP (reform-
linkedas per paras 5 to 8 of DOE OM)
or
Basic eligibility (3% of GSDP) + 1% of GSDP + up to 1% of
GSDP (reform-linked as per paras 5 to 8 of DOE OM)
whichever is h
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e Commission etc.
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.
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1.
Annex 1: Background Information
As per Section 7 of the GST (Compensation to States) Act, 2017, the States are
required to be compensated for loss of revenue due to implementation of GST (w.e.f.
01.07.2017) for 5 years' period. For the purpose of paying such compensation to
States, as per section 8 of GST (Compensation to States) Act, 2017, there is provision
for levy of cess on certain luxury items and demerit goods and this cess collected is to
be credited into a Public Account known as GST Compensation Fund and bi-monthly
payment of GST Compensation to States is released from Compensation Fund durin
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7-18 & 2018-19 and current year cess
collection as well.
Compensation Cess collected and compensation released
(Figures in Crore)
Compensation Cess
Collected (Net)
2017-18 2018-19
62,612 95,081
2019-20
2020-21
95,444
21,355
Total
2,74,492
(till
July'21)
Compensation released
41,146 69,275
1,20,498
65,546 2,96,465
(till Nov'19)
(till
Mar'20)
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Balance
21,466 25,806 (-25,054) (-44,191) (-21,973)¹
4.
Further, the likely monthly cess collection of less than ☠8,000 cr per month
after 30th June, i.e. on opening of Economic Activities after Covid-19 pandemic, is not
sufficient to meet the requirement of GST compensation liability and therefore, there
is a need to discuss ways and means to fill the gap between the compensation
requirement and compensation cess collection.
5. This issue was discussed in the 41st GST Council meeting held on 27th August
2020. The GST Council took note of the fact the projected shortfall for the current
year would be of t
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57,266
6.
Estimated Compensation Shortfall [(4)-(5)]
96,477
¹Taking into account the amount 33,412 crore transferred from the Consolidated Fund of
Indiato Compensation Cess Fund as a part of an exercise to apportion balance of IGST
pertaining to 2017-18, the cess balance available in CFI as on 31st July, 2020 is 11,438
crore
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Annex 2: Opinion of the Attorney General of India
Taking into account the shortage of cess collection during current FY, Central
Government has sought the legal opinion of Ld. Attorney General of India on 5 points
on the issue of release of GST compensation to States vide note dated 01.06.2020 and
the point-wise summary of opinion given by Ld. Attorney General is as under:—
(i) 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
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on exists in the Compensation Act for extending the
period of five years for payment of compensation to the States. Section 8(1)
would only entitle an extension in regard to the period of the levy and
collection of the Cess, beyond the period of five years, if the Council so
recommends.
AG has further clarified that:
Where, on account of extraordinarycircumstances causing a steep fall in GST
revenues and a shortfall in theFund, the states cannot be paid full compensation
during the transitionperiod, the shortfall in the payment of compensation could
be made up evenafter the transition period of 5 years. Of course, a
recommendation by the GST Council extending the levy andcollection of the
cess beyond 5 years under Section 8(1) of the Act, wouldrequire a decision by
a three-fourth majority of the weighted votes.
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(iv) 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
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