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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\nDocument 1
\nGST COMPENSATION OPTIONS
\nThis paper describes the two options mentioned at the GST Council
\nmeeting on 27th August 2020, with a view to enabling the States to give their
\npreference and views thereon within seven working days. Certain background
\ninformation as furnished in the Council meeting is appended in Annex 1.
\nAfter the scheme is finalized, the states c<\/p>\n
= = = = = = = =<\/p>\n
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For full text:-Visit the Source <\/a><\/p>\n
\nThe said Act provides in Section 7 the detailed mechanism for calculation
\nand payment of compensation to the States. In essence, the compensation
\npayable is the projected revenue (at a compound growth rate of 14% from the
\nbase figure of 2015-16) minus the actual revenue in each period.
\nThe Constitution and the preamble to the Act lay out the spirit and
\npurpose of the GST compensation: namely that it is to compensate states for
\nloss of revenue \u201carising on account of implementation of GST\u201d. The wording
\nof the Constitutionand statutory preamble make it clear that the spirit of the
\n1
\nlaw is not to compensate states for all types of revenue losses, but rather for
\nthat loss arising from GST implementation.
\nThis year the Indian economy, nay the global economy, is suffering from
\nan exogenous shock, namely the Covid-19 pandemic, whose scope and scale is
\nunprecedented in history.
\nParliament obviously could not have contemplated <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nSection 7 “shall be paid out of the Fund”.
\nIt has been clarified by the Attorney General that the Act does not
\nrequire the Government of India to bear the liability of making good the
\nshortfall and that it is the GST Council which has to decide on making good the
\nshortfall.
\nIn short the correct legal position is that:
\n(i)
\nThe states are entitled to compensation as per the method provided
\nin Section 7 for the transition period, regardless of the cause of the
\nshortfall
\n(ii)
\n(iii)
\nHowever, compensation is to be paid only from the Compensation
\nFund and it is not an obligation of the Government of India in the
\nevent of a shortfall
\nIt is for the GST Council to decide on the mode of making good the
\nshortfall.
\n2
\n(iv)
\nTo the extent the shortfall is not made good, the States would still be
\neligible to get it in arrears after the transition period through
\nextension of the Cess, if so decided by the Council.
\nEARLIER DISCUSSIONS ON RESPONSIBILITY FOR S<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nCentral Government, which would be a challenge as the Central Government also had
\nits own committed expenditure. He said that based on these considerations, certain
\nprinciples had been agreed upon, namely that the compensation would be funded
\nout of the cess mechanism, which would have a pool of revenue and if there was any
\nshortfall in this pool, it could be supplemented by some mechanism that the Council
\nmight decide”[Para 21].
\nTherefore, it is very clear from the deliberations of the Council that the
\ncompensation had to be paid out of the Compensation Fund and not the
\nConsolidated Fund of India. This issue was again raised in the 8th meeting held
\non 3-4 January, 2017, wherein the Chairperson stated that
\n“…..in case the amount in the GST Compensation Fund fell short of the
\ncompensation payable in any bimonthly period, the GST Council shall decide the
\nmode of raising additional resources including borrowing from the market which
\ncould be repaid by collecti<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nGovernment of India is not a new or fanciful interpretation of
\nthe law. It is the correct and proper interpretation which was
\nthoroughly discussed in the GST Council and in Parliament
\nbefore the relevant legislation was passed.
\nThe Government of India is committed to implementation of
\nthe Act in letter and in spirit-in letter by adhering to the
\nlegal provisions and in spirit by honouring the commitment
\nmade by the former Chairperson in regard to the manner of
\nmeeting the shortfall. In accordance with this commitment,
\ncertain options for borrowing are presented here. The
\nGovernment of India will support extension of the
\nCompensation Cess for such period as may be necessary to
\ncompletely discharge any arrears of compensation.
\nWays of Meeting the Shortfall:
\nThe prevailing economic situation is such that Central revenues are
\nunder greater strain than GST revenue. While indirect taxes are linked to
\ntransactions, and recover i<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nThe yield on G-secs acts as a benchmark for State borrowing as well as private
\nsector borrowing. Hence any rise in Central borrowing costs ipso facto drives
\nup borrowing costs for all borrowers, including not only the States but also the
\nentire private sector.
\nOn the other hand, the yields on State Government securities do not
\ndirectly influence other yields and do not have the same type of macro-
\neconomic repercussions. Hence it is in the collective interest of Centre and
\nStates, and in the interest of the nation and of all economic entities including
\nthe private sector, not to do any avoidable borrowing at the Central level when
\nit could be done at the State level.
\nBorrowing by states typically incurs a higher interest cost than
\nborrowing by the Centre. The Government of India is conscious of this and
\nhas factored this below, with a view to protecting the states so that they are
\nnot adversely affected.
\nI.
\nII.
\nOption 1
\nThe <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nThe interest on the borrowing under the Special Window will be paid
\nfrom the Cess as and when it arises until the end of the transition period.
\nAfter the transition period, principaland interest will also be paid from
\nproceeds of the Cess, by extending the Cess beyond the transition period
\nfor such period as may be required. The State will not be required to
\nservice the debt or to repay it from any other source.
\nStates will also be given permission to borrow the final instalment of
\n0.5% (originally intended as a bonus for completing at least three of the
\nfour specified reforms) allowed in para 4 of the Department of
\nExpenditure's OM F.No. 40(06)\/PF-S\/2017-18 dated 17-5-20 (hereinafter
\nreferred to as DOE OM) even without meeting the pre-conditions. This
\nwill enable borrowing of approximately Rs. 1 lakh crores in aggregate.
\nThe first instalment of 0.5% unconditional borrowing permission granted
\nvide para 4 of the DOE<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nduring the transition period would be paid after the interest and
\nprincipal are paid.
\nI.
\nII.
\nIII.
\nOption 2
\nThe entire shortfall of Rs 235,000 crores (including the Covid-impact
\nportion) may be borrowed by States through issue of market debt. The
\nGOI will issue an OM committing to repayment of principal on such debt
\nfrom Cess proceeds as per para IV below.
\nAppropriateenhanced special borrowing permission will be given by the
\nGOI under Article 293 based on the following methodology, in
\nmodification of scheme notified earlier under the DOE OM:
\na. Each state's borrowing limits for the year will be based on the
\nfollowing calculation:
\nBasic eligibility (3 % of GSDP) + Amount allowedfor shortfall
\nas per Item I above of Option 2+ up to 1% of GSDP (reform-
\nlinkedas per paras 5 to 8 of DOE OM)
\nor
\nBasic eligibility (3% of GSDP) + 1% of GSDP + up to 1% of
\nGSDP (reform-linked as per paras 5 to 8 of DOE OM)
\nwhichever is h<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nThe Compensation Cess will be continued after the transition period until
\nsuch time as all arrears of compensation for the transition period are paid
\nto the states. The first charge on the future Cess would be the principal
\nrepayment. The remaining arrears of compensation accrued during the
\ntransition period would be paid after the principal is paid.
\n8
\n1.
\nAnnex 1: Background Information
\nAs per Section 7 of the GST (Compensation to States) Act, 2017, the States are
\nrequired to be compensated for loss of revenue due to implementation of GST (w.e.f.
\n01.07.2017) for 5 years' period. For the purpose of paying such compensation to
\nStates, as per section 8 of GST (Compensation to States) Act, 2017, there is provision
\nfor levy of cess on certain luxury items and demerit goods and this cess collected is to
\nbe credited into a Public Account known as GST Compensation Fund and bi-monthly
\npayment of GST Compensation to States is released from Compensation Fund durin<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\ncollection as well.
\nCompensation Cess collected and compensation released
\n(Figures in Crore)
\nCompensation Cess
\nCollected (Net)
\n2017-18 2018-19
\n62,612 95,081
\n2019-20
\n2020-21
\n95,444
\n21,355
\nTotal
\n2,74,492
\n(till
\nJuly'21)
\nCompensation released
\n41,146 69,275
\n1,20,498
\n65,546 2,96,465
\n(till Nov'19)
\n(till
\nMar'20)
\n9
\nBalance
\n21,466 25,806 (-25,054) (-44,191) (-21,973)\u00c2\u00b9
\n4.
\nFurther, the likely monthly cess collection of less than \u00e2\u02dc\u0090 8,000 cr per month
\nafter 30th June, i.e. on opening of Economic Activities after Covid-19 pandemic, is not
\nsufficient to meet the requirement of GST compensation liability and therefore, there
\nis a need to discuss ways and means to fill the gap between the compensation
\nrequirement and compensation cess collection.
\n5. This issue was discussed in the 41st GST Council meeting held on 27th August
\n2020. The GST Council took note of the fact the projected shortfall for the current
\nyear would be of t<\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\n6.
\nEstimated Compensation Shortfall [(4)-(5)]
\n96,477
\n\u00c2\u00b9Taking into account the amount 33,412 crore transferred from the Consolidated Fund of
\nIndiato Compensation Cess Fund as a part of an exercise to apportion balance of IGST
\npertaining to 2017-18, the cess balance available in CFI as on 31st July, 2020 is 11,438
\ncrore
\n10
\n10
\nAnnex 2: Opinion of the Attorney General of India
\nTaking into account the shortage of cess collection during current FY, Central
\nGovernment has sought the legal opinion of Ld. Attorney General of India on 5 points
\non the issue of release of GST compensation to States vide note dated 01.06.2020 and
\nthe point-wise summary of opinion given by Ld. Attorney General is as under:\u2014
\n(i) In case the balance in the Goods and Services Tax Compensation
\nFund is not adequate to meet the compensation payable under Section 7,
\nare the States still entitled to receive the full amount of compensation
\ncalculated as per the provisions of the Goods and <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n
\nperiod of five years for payment of compensation to the States. Section 8(1)
\nwould only entitle an extension in regard to the period of the levy and
\ncollection of the Cess, beyond the period of five years, if the Council so
\nrecommends.
\nAG has further clarified that:
\nWhere, on account of extraordinarycircumstances causing a steep fall in GST
\nrevenues and a shortfall in theFund, the states cannot be paid full compensation
\nduring the transitionperiod, the shortfall in the payment of compensation could
\nbe made up evenafter the transition period of 5 years. Of course, a
\nrecommendation by the GST Council extending the levy andcollection of the
\ncess beyond 5 years under Section 8(1) of the Act, wouldrequire a decision by
\na three-fourth majority of the weighted votes.
\n11
\n(iv) Can the States borrow on the strength of the future receipts from
\nthe Compensation Fund to meet the compensation gap either fully or
\npartially?
\nOpinion <\/p>\n
For full text:-Visit the Source <\/a><\/p>\n