Centre releases Rs.75,000 crore as GST compensation

The government has borrowed, and given to the states, a sum of Rs.75,000 crore to make up for the GST collection shortfall.

 Centre releases Rs.75,000 crore as GST compensation

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• The story: The government has borrowed, and given to the states, a sum of  Rs.75,000 crore to make up for the shortfall in their revenues because of the GST implementation. The amount released is about half of the Rs.1.59 lakh crore agreed to be borrowed in the fiscal FY22 by Centre and passed on to the states and Union Territories, on a back-to-back basis to meet their resource gap. This is front-loading, to help states spend on capital expenditure, needed to boost GDP growth during pandemic slowdown.
• Details: This amount released is in addition to the normal GST compensation paid bi-monthly to states out of the collections made from the levy of a cess on luxury and sin goods.

1. The Finance Minister said, “Almost 50 per cent of the total shortfall for the entire year released in a single instalment”.
2. The Centre estimated the shortfall in GST compensation payable to the states in the current fiscal at Rs 2.59 lakh crore, of which about Rs 1.59 lakh crore would have to be borrowed now.
3. The Centre expects to collect over Rs.1 lakh crore through cess on luxury, demerit and sin goods, which will be given to the states to compensate them for the shortfall in revenue arising out of the GST implementation.
4. The remaining Rs 1.59 lakh crore is to be borrowed.

• GST Council meeting: In the May 28 GST meeting, it was decided that the central government would borrow Rs 1.59 lakh crore and release it to states and UTs with the legislature on a back-to-back basis to meet the resource gap. This gap arose due to the short release of compensation on account of the inadequate amount in the compensation fund. That was due to economic slowdown and recession.

1. All eligible states and UTs (with the legislature) agreed to the arrangements for the funding of the compensation shortfall under the back-to-back loan facility.
2. For effective response and management of COVID-19 pandemic and a step-up in capital expenditure, all States and UTs need funds, and hence this step.

• Technicals: The release of Rs 75,000 crore being made now is funded from borrowings of the Centre in 5-year securities, totalling Rs 68,500 crore and 2-year securities for Rs 6,500 crore issued in the current financial year, at a weighted average yield of 5.60 and 4.25 per cent per annum, respectively.
• Tax collections: The release of these funds from the Government of India’s borrowings raised so far, corroborates the inference that healthy tax and non-tax revenues have boosted the cash flows of the central government. In FY 21 too, the Centre had borrowed and released to the states Rs 1.10 lakh crore towards GST compensation. Besides, Rs 70,000 crore was released from the compensation fund. For fiscal 2020-21, about Rs 63,000 crore GST compensation was pending to the states/UTs as of March 30, 2021.
• Summary: It is clear that the compensation cess will have to be extended beyond the first five-year period 2017-2022. 

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