Centre releases Rs 75,000 crore to states as GST compensation shortfall

Finance Minister Nirmala Sitharaman at a GST Council meet (Image: Twitter/@FinMinIndia)

The Finance Ministry, on July 15, said it has released Rs 75,000 crore to the states in lieu of Goods and Service Tax (GST) compensation shortfall.

The government said that almost 50 percent of the total shortfall for the entire year has been released in this single installment as a result, and the balance amount will be released in the second half of 2021-22 in steady installments.

The funds will be provided under the back-to-back loan facility for states first announced by the Centre last year. This latest release is in addition to normal GST compensation being released every two months out of actual cess collection, the government said.

This arrangement was decided upon in the 43^rd GST Council meet held on May 28 in the backdrop of the states being owed GST compensation of over Rs 2 lakh crore.

"This amount of Rs.1.59 lakh crore would be over and above the compensation in excess of Rs. 1 lakh crore(based on cess collection) that is estimated to be released to States/UTs with Legislature during this financial year," the Finance Ministry said on 15 July.

"The release of Rs. 75,000 crore being made now is funded from borrowings of GoI in 5-year securities, totaling 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 percent per annum respectively," it added.

The latest amount is as per the principles adopted for a similar facility in FY 2020-21, where an amount of  Rs 1.10 lakh crore was released to States under a similar arrangement.

"The release of GST compensation of Rs 75,000 crore will substantially ease the cash flows of the state governments and help them to ramp up expenditure. This will complement the pickup in momentum being seen after the phased unlocking and bodes well for sustaining the nascent revival," said Aditi Nayar, Chief Economist with Icra Ltd.

"The release of these funds from the centre’s own borrowings raised so far, corroborates the inference that healthy tax and non tax revenues have boosted the cash flows of the central government," Nayar said.

While these borrowings have been made by the centre, they will not count in its gross borrowing target of Rs 12.5 lakh crore for 2021-22 as the liability is being passed onto the states immediately

Going forward

"The release of the compensation shortfall amounts committed to states would alleviate the fiscal position of states; however, the recovery of the amounts borrowed to make the payments would necessitate the extension of the period during which the compensation cess is levied beyond 2022," said MS Mani, Senior Director at Deloitte India.

The sum total of Rs 2.59 lakh crore is expected to exceed the amount of GST compensation accruing in FY 2021-22, it added. For FY22, the Centre has pegged the total  GST compensation requirement at Rs 2.7 lakh crore, of which Rs 1.1 lakh crore is expected to be met through cess collection.

Owing to the ongoing pandemic, a revenue growth of 7 percent has been assumed to forecast the shortfall and borrowing requirement, similar to last year. The cess collection is expected to be inadequate in FY22 with the COVID-19 pandemic disrupting the economy for the second year.

All eligible States and UTs (with Legislature) have agreed to the arrangements of funding of the compensation shortfall under the back-to-back loan facility.  For effective response and management of COVID-19 pandemic and a step-up in capital expenditure all States and UTs have a very important role to play, the government said.

The Centre said it expects the latest release to help states in planning their public expenditure among other things, for improving, health infrastructure and taking up infrastructure projects.