Centre to Borrow on Behalf of States to meet the GST shortfall 

Centre to Borrow on Behalf of States to meet the GST shortfall 

Part of: GS Prelims and GS-II – Federalism & GS-III – Taxation

In news

• Recently, the Centre has decided to borrow an estimated revenue shortfall of Rs. 1.1 lakh crore as loans to States to meet the GST shortfall.

Key takeaways 

• The borrowing will not have any impact on the fiscal deficit of the Government as the Centre is acting as mediator only.
• The Centre will borrow the loan and pass on to the states.
• The amounts will be reflected as the capital receipts of the state governments and it will be a part of financing its respective fiscal deficits.

Background of the news

• The economic slowdown due to covid-19 had reduced both GST and cess collections in FY 2019-20, due to which there was 40% gap (shortfall) between the compensation paid and cess collected.
• The Centre distinguished the GST shortfall into two types: (1) Due to GST implementation itself; (2) due to the impact of Covid-19.
• The fall of GST revenue due to Covid-19 was termed as an act of God. 
• Also, the GST Compensation Act, 2017 guaranteed states that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods. It did not foresee an act of God.
• Thus, The Centre had earlier refused to compensate GST shortfall arising due to covid-19 to the states.  
• In August 2020 at GST Council meet, the Centre had proposed two options to states to meet the shortfall: (1) A special window could be provided, in consultation with the RBI so that the states can get Rs. 97,000 crore at a reasonable rate of interest. The amount can be repaid after five years (of GST implementation) ending 2022 from cess collection; (2) Another option is that this entire gap of Rs. 2.35 lakh crore can be met by the borrowing by the states in consultation with RBI.
• However, many states were against these two options and were planning to move the Supreme Court over the issue.

Benefits of the recent decision

• The borrowing by the Centre would avoid differential rates of interest that individual states may be charged for their respective State Development Loans (SDLs).
• The country’s general government debt, which includes both the Centre’s and States’ borrowings will not increase due to this step.
• The States that get the benefit from the Special Window may borrow a lesser amount from the additional borrowing facility of 2% of Gross State Domestic Product under Atma Nirbhar Package.

Important value additions 

Goods and Services Tax

• GST was introduced through the 101st Constitution Amendment Act, 2016.
• It is an indirect tax on the supply of final goods and services. 
• It has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax etc.
• It is levied at the final consumption point.
• It is levied only on the value addition. 
• It is collected on goods and services at each point of sale in the supply line.
• The GST avoids the cascading effect or tax on tax which increases the tax burden on the end consumer.
• Tax Structure under GST: (1) Central GST to cover Excise duty, Service tax etc.; (2) State GST to cover VAT, luxury tax etc.; (3) Integrated GST to cover inter-state trade.
• It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.