Borrowing Decisions made by the States under GST Compensation Act 

Borrowing Decisions made by the States under GST Compensation Act 

Borrowing Decisions made by the States under GST Compensation Act 

It is a known fact that the global pandemic of COVID-19 has brought grave losses to humanity as well as the tax collections this year as per the Government reports. Since the introduction of GST in 2017, the Union Government had promised a certain amount of their revenues as GST compensation to the states till the year 2022 to compensate the states as a result of the elimination of 17 states and union level taxes in India.

However, in the 41st GST Council meeting, the Union Government showed its intention to arrange funds for compensating the states by giving two options which included-

a.     The first option involved the offer of a special window to states, in consultation with the RBI to the tune of Rs.97000 crores at a reasonable rate. 

b.    The other was for the states to borrow Rs.2.35 trillion from the market with RBI as a facilitator.

States will have to tolerate the interests if they choose to borrow the entire Rs 2.35-trillion shortfall accepting the second alternative. Further, the proposed extension of compensation cess will be used for paying only the principal, and not the interest.

Also, the burden of such repayment shall be on the Union Government and not on the state Government. It has also been informed that the center will facilitate borrowing by recommending the same to the Reserve Bank of India. This is to ensure individual states do not rush to the market and raise bond yields. The states and Union Territories were later given time to think and choose any one option from those provided in the GST Council.

In an earlier week, a total of 21 states and Union Territories have agreed for its offer of the Rs 97,000-crore Reserve Bank of India (RBI) window giving them compensation under the goods and services tax (GST) regime. This will help clear this proposal at the GST Council in case of the vote including Manipur being the first state to opt for borrowing by the states and later preferred to change it to the RBI window. 

The 21 states and Union Territories that have welcomed the first option are namely-  Assam, Arunachal Pradesh, Andhra Pradesh, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand, and Uttar Pradesh (UP). Others are expected to give their assent soon.

As per the provisions of the GST Council, a GST Council requires a majority of at least 75 percent votes. Or 2/3rd majority to pass a resolution through a weighted average method, with the Centre having 1/3rd weightage and states collectively having 2/3rd weightage, which means the Centre has 33.33 percent of total votes in the GST Council and each of the state’s form 2.22 per cent vote, irrespective of the size and the GST collection of the States.

Thus, it is evident that the GST Council needs only 20 states to pass any resolution in case voting is required under the provisions of the GST Act. On the other hand, states like Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, and West Bengal are yet to respond to any of the proposals.

Nevertheless, none of the states has opted for the Centre’s offer of borrowing by states to the tune of Rs 2.35 trillion. Therefore, choosing this alternative may leave those not choosing for any of the two options offered by the Centre before the GST Council meeting scheduled for October 5 in the motion. Thus, it is clear from the present situation that these states will have to wait till June 2022 to get their compensation, subject to the council extending the cess collection period beyond June 30, 2022.

Earlier, the Ministry of Finance assessed there would be a compensation gap of Rs 3 trillion for states and the compensation cess would be around Rs 65,000 crore for the current fiscal year, making a gap of 2.35 trillion for compensating the states and falling short with an amount of 97,000 crores.


Thus, it could be understood that the Ministry of Finance and the GST Council is taking active steps to curb the effects of the pandemic and is working with an intention to “compensating the states” despite the statement from the Attorney General of India quoting “the Union Government is not under an absolute obligation to compensate the states at the times of pandemic.


eStartIndia Team

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