Centre frontloads Rs 75,000 crore to states as GST compensation

Move to help state govts spur capex amid pandemic

In a bid to spur spending by states amid the Covid-19 pandemic, the Centre on Thursday released as compensation nearly half of the estimated goods and services tax (GST) shortfall for the current fiscal year under the back-to-back loan facility.

The Ministry of Finance released Rs 75,000 crore of the Rs 1.59-trillion estimated as GST revenue shortfall in a single instalment, to facilitate capital spending by states, besides allowing better management of the pandemic, with most states reeling from severe fiscal stress.

The remaining amount will be released to states in the second half of the fiscal year in steady instalments.

“For effective response and management of the Covid-19 pandemic and a step-up in capital expenditure (capex), all states and Union Territories (UTs) have a very important role to play. For assisting states/UTs in their endeavour, the Ministry of Finance has front-loaded the release of assistance under the back-to-back loan facility during 2021-22 (FY22),” the ministry said in a statement. The Ministry of Finance in the GST Council meeting on May 28 had proposed market borrowing to the tune of Rs 1.58 trillion to compensate states for the GST shortfall through back-to-back loans, like last year, assuming a 7 per cent growth in revenue. The GST compensation requirement for FY22 has been pegged at Rs 2.7 trillion, of which Rs 1.1 trillion is expected to be met through cess collection.

“All eligible states and UTs (with the legislature) have agreed to the arrangements for the funding of the compensation shortfall under the back-to-back loan facility,” said the finance ministry.

Centre had projected a gap of Rs 30,000 crore spilled over from last year, which it expects to meet through Rs 1.58-trillion borrowing proposed for FY22. It is expected that this release will help states/UTs in planning their public expenditure for improving health infrastructure (infra0 and taking up infra projects, said the government statement.

The Centre’s borrowing programme for the remaining period of the first half of the current fiscal year — as announced in the issuance calendar for marketable dated securities for April 2021-September 2021 released on March 31 — will remain unchanged, it stated.

Aditi Nayar, chief economist, ICRA Ratings, said the release of these funds from the Government of India’s (GoI’s) own borrowings raised so far corroborates the inference that healthy tax and non-tax revenues have augmented cash flows of the central government. She added that the release of Rs 75,000 crore will substantially ease cash flows of state governments and help them ramp up expenditure.

“This will complement the pick-up in momentum being seen after the phased unlocking, and bodes well for sustaining the nascent revival,” said Nayar.

M S Mani, senior director, Deloitte India, pointed out that while the release of the compensation shortfall amounts committed to states would alleviate the fiscal position of states, 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.

States were promised compensation for five years after GST implementation in July 2017 revenue shortfall, assuming a 14-per cent annual growth, since states lost autonomy over indirect taxes. Compensation cess is levied on a few items in the 28-per cent GST slab, such as automobiles, cigarettes, and aerated drinks. 

Aditya Singhania, partner, Singhania’s GST Consultancy & Co., said the release of Rs 75,000 crore compensation in anticipation of the third Covid-19 wave will iron out the issues being faced by states in handling health and other capex.

Last year, the Centre had estimated a GST compensation requirement of Rs 2.35 trillion, of which Rs 1.1 trillion was met by way of borrowing and another Rs 70,000 crore came from compensation cess collection, leaving a gap of Rs 55,000 crore, which the government had promised to fulfil over the course of time. The release of Rs 75,000 crore is funded from the borrowings of GoI in five-year securities, totalling Rs 68,500 crore and two-year securities for Rs 6,500 crore issued in the current fiscal year, at a weighted average yield of 5.6 and 4.25 per cent per annum, respectively.