The Centre has recently made the decision to borrow an estimated revenue shortfall of Rs. 1.1 lakh crore as a loan to issue to States to meet the Goods and Services Tax (GST) shortfall. This move has significant implications for both the Centre and the states.
Borrowing and its Impact on the Fiscal Deficit
The borrowing will not have any impact on the fiscal deficit of the Government of India as the Centre is acting merely as a mediator. That is, they are borrowing the loan and subsequently passing it on to the states. These amounts will be reflected as the capital receipts of the state governments and will form a part of the financing of their respective fiscal deficits.
Background
The economic slowdown has had a substantial effect on both GST and cess collections in FY 2019-20, resulting in a 40% gap, or shortfall, between the compensation paid and cess collected. The state’s GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are projected to reach only Rs. 65,000 crore. This leaves a shortfall of Rs. 2.35 lakh crore. This GST shortfall can be categorised into two types: those due to the implementation of the GST itself and those caused by the impact of Covid-19.
Discussion on GST Shortfall
The Finance Minister has termed the fall of GST revenue due to Covid-19 as an act of God, highlighting that the GST Compensation Act, 2017 did not foresee such an event. This act 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. However, the Centre and many states have been at loggerheads over the compensation issue due to the GST shortfall.
Proposed Solutions
The Centre proposed two options at the GST Council meet in August 2020 to help states meet the shortfall. Firstly, a special window could be provided, in consultation with the Reserve Bank of India (RBI), so that states could borrow Rs. 97,000 crore at a reasonable rate of interest. This amount could be repaid after five years from cess collection. Secondly, the entire gap of Rs. 2.35 lakh crore could be met by borrowing by the states in consultation with RBI. However, many states opposed these two options and were considering taking the issue to the Supreme Court.
Benefits of Borrowing
The borrowing by the Centre would circumvent differential rates of interest that individual states may be charged for their respective State Development Loans (SDLs), leading to a more administratively efficient arrangement. Furthermore, the country’s general government debt, which includes both the Centre’s and States’ borrowings, will not increase due to this step.
The Impact on State’s Borrowing Limits
States utilising the Special Window are likely to borrow considerably less from the additional borrowing facility of 2% of Gross State Domestic Product under the Atma Nirbhar Package. The borrowing limits of state governments increased from 3% to 5% of the GSDP for the year 2020-21 under the Atma Nirbhar Package.
Pertaining to Goods and Services Tax
GST was introduced in 2016 via the 101st Constitution Amendment Act as an indirect tax levied on the supply of final goods and services. It replaced various indirect taxes like the excise duty, Value Added Tax (VAT), service tax, and luxury tax. GST is levied only on the value addition and is collected at every point of sale in the supply line, allowing merchants to set off the GST they pay to procure goods or services against the tax applicable on the supply of final goods and services.
Tax Structure under GST
The GST includes Central GST covering excise duty and service tax, State GST to cover VAT and luxury tax, and Integrated GST to cover inter-state trade – a system to coordinate state and union taxes rather than a separate tax. The GST sports a 4-tier tax structure for all goods and services under the slabs: 5%, 12%, 18%, and 28%.