All the 28 states and the three Union Territories with legislatures have chosen the Centre’s ‘Option 1’ proposal to meet the revenue shortfall of Goods and Services Tax (GST). Jharkhand was the last state to give its acceptance to the Centre for Option 1, while the states of Kerala, West Bengal, Punjab and Chattisgarh had approved earlier.
As per the the terms of Option-1, the Centre would borrow a total of ` 1.1 lakh crore through a special RBI window and transfer the funds to states as back-to-back loans without any consequent fiscal impact on states. This is to help the states to meet the shortfall arising out of GST implementation. The states are also entitled to get unconditional permission to borrow the final instalment of 0.50 percent of Gross State Domestic Product (GSDP) out of the two percent additional borrowings permitted by the Centre under the AtmaNirbharAbhiyaan. This is over and above the Special Window of ` 1.1 lakh crore.
The Centre would take authorisation from states that repayment of the loan would be made only from the GST compensation cess which is being collected. Repayment schedule will be worked out such a way that the collections in cess pool post June 2022 would be sufficient to repay the interest arising out of borrowing.
There was a division in the GST Council over the compensation issue as the centre initially wanted the states to borrow for themselves, it resolved only when the central government agreed to borrow on behalf of the states. The window has been operationalised since October 23, 2020 and the Centre has already borrowed an amount of ` 30,000/- crores on behalf of the states in five instalments. The instalment of ` 6,000/- crores was to be released on December 7, 2020.
It is to be noted that, under the GST law, which was implemented in 2017, the states were guaranteed compensation for any loss of revenue in the first five years of the new indirect tax regime. The states were mandated to increase their share of revenues by 14 per cent per year. GST collections have been severely impacted in the year 2020 due to Covid-19 pandemic. The GST Council has already decided to extend the cess beyond June 2022 to mobilise resources for financing the special window.
Articles 292 and 293 state the borrowing provision of Centre and states. As per Article 292, the Centre can borrow amounts specified by the Parliament from time to time. Article 293 mandates the state governments to borrow only from internal sources.