GST Council Meeting Highlights| Govt will give further 0.5% relaxation in states' borrowing limit under FRBM Act: FM Sitharaman

MS Mani , Partner, Deloitte India: Not considering any rate increases to make up for the shortfall in cess is a welcome measure, however moving to a market borrowing mechanism which would extend the tenure of the cess beyond 5 years would worry businesses that are subject to the cess.

GST Council Meeting LIVE Updates | FM Nirmala Sitharaman: If each state rushes to the market, it will heaten bond yields, so we thought it sensible to approach RBI to help us and facilitate the process, whereby all states could possibly get loan at the same rate.

GST Council Meeting LIVE Updates | Revenue Secretary: Repayment of loans, including interest payments, will be made through the cess collected from 6th year onwards; in no case will the states be burdened (they will not have to tap into other sources of revenue for loan repayment).

GST Council Meeting LIVE Updates | FM Nirmala Sitharaman (in response to a media query): The GST Council agreed that this is not the appropriate time to talk of increases in tax rates.

GST Council Meeting LIVE Updates | FM Nirmala Sitharaman: The government will give a further relaxation of 0.5 percent in states' borrowing limit under FRBM Act as second leg of Option 1. States can choose to borrow more, beyond the expected compensation itself, since that is the injury caused by COVID-19. If a state goes for Option 1, it will borrow less, but its compensation entitlement will be protected. So choice is between i) borrowing less & getting cess later, & ii) borrow more & pay for it using cess collected during transition period.

GST Council Meeting LIVE Updates | FM Nirmala Sitharaman: First option has two legs: 1) Centre facilitating states through RBI, in getting loans - for that portion arising out of GST implementation. 2) The gap arising in compensation due to the extraordinary situation and Act of God in the form of COVID-19.

There may be some states which may prefer to get the hard-wired compensation rather than going to the market to borrow more. The option was tailor-made considering that states can take a call depending on the compensation they expect to come.
 

GST Council Meeting LIVE Updates | Revenue Secretary: During April - July 2020, total GST compensation to be paid is Rs 1.5 lakh crore, this is so because there was hardly any GST collection in April and May. Annual GST compensation requirement is estimated to be around Rs 3 lakh crore, and cess collection is expected to be around Rs 65,000 crore, leaving us with an annual compensation gap of Rs 2.35 lakh crore.

GST Council Meeting LIVE Updates | FM Nirmala Sitharaman: Once the arrangement is agreed upon by GST Council, we can proceed fast and clear these dues and also take care of the rest of the financial year. These options shall be available only for this year; in April 2021, the Council will review and decide action for 5th year.

GST Council Meeting LIVE Updates | FM Nirmala Sitharaman: Two options were placed before states, we told them that we will facilitate talking with RBI and help getting G-security linked interest rates so that each state does not have to struggle for loans. States have requested us to lay down both options in detail, and give them 7 full working days to deliberate on it and get back, a brief GST Council meeting may be held again.

GST Council Meeting LIVE Updates | Finance Secretary: States have requested a 7-day window to think over and get back to Finance Ministry. These options would be available only during current year, situation would be reviewed next year and decision made on what is best for the country.

GST Council Meeting LIVE Updates | Option 2: Entire GST compensation gap of Rs 2,35,000 crore of this year can be met by the states, in consultation with RBI.

GST Council Meeting LIVE Updates | Option 1: To provide a special window to states, in consultation with RBI, to provide the Rs 97,000 crore at a reasonable rate of interest, this money can then be repaid after 5 years from collection of cess.