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GST compensation: 21 states go for Option 1 borrowing plan

Dipak Mondal     September 20, 2020

Even as 21 states and Union Territories have opted for Option 1 of the borrowing plan recommended by the GST Council to plug their compensation gap, states like Jharkhand, Kerala, Maharashtra, NCT of Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana, and West Bengal are yet to respond to the GST Council's proposal to decide their options, sources in the finance ministry said.  

However, these states boycotting either of the Options may not be able to thwart the central government from going ahead with its plan - asking states to borrow to make good of the GST compensation shortfall.

Finance Ministry sources said that the GST Council with full presence of states and UTs needs, as per the GST Act, only 20 states to pass any resolution, in case voting is required on any issue.  

They also said that if the other states do not submit their options before the due GST Council meet on 5 October 2020, then they will have to wait till June 2022 to get their compensation dues subject to the condition that the GST Council extends the cess collection period beyond 2022.

States and UTs, wich opted for Option 1 include Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tripura, Uttarakhand and Uttar Pradesh have. Manipur, the only state which had earlier opted for the Option 2, has now changed it to Option 1.

On 27 August 2020, the GST Council in its 41st meeting had decided to give its member states two borrowing options to meet their compensation shortfall and a response time of 7 working days from the formal receipt of the detailed proposal on Options by email. Almost 15 states had submitted their options by 15 September. The Union finance ministry is to facilitate the borrowings through the RBI's single window at the lowest possible single rate interest to all the states and UTs as per their individual choice.

Under the Option 1 borrowing plan, states will borrow the shortfall arising out of GST implementation, estimated at Rs 97,000 crores approximately, through issue of debt under a special window coordinated by the Ministry of Finance. The main feature of Option 1 is that both the interest and the principal will be repaid by the Central government on behalf of the states from the compensation cess levied on sin goods.

Further, a special borrowing permission will be given by the Centre under Article 293 for this amount, over and above any other borrowing ceilings eligible under any other normal or special permission notified by Department of Expenditure. Also, under this option, the Centre will endeavour to keep the cost at or close to the G-secs yield, and in the event of the cost being higher, will bear the margin between G-secs and average of State Development Loan yields up to 0.5% (50 basis points) through a subsidy.

Under Option 2, states would borrow the entire compensation shortfall of Rs. 2.35 lakh crore (including the COVID-impact portion) through issue of market debt. However, unlike in Option 1, the Centre will only take responsibility for repayment of the principal amount and states will have to bear the cost of interest.

Also read: GST Council to take final decision on compensation payout to states: Sitharaman

Also read: GST compensation shortfall: 12 states pick option 1 of borrowing scheme

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