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%.
