Explained: Rs 1.59 lakh crore GST compensation and back-to-back loan facility

This is the third time when the Centre has released GST compensation to States and UTs as back-to-back loan in the current financial year, taking the total amount of such loans to Rs 1.59 lakh crore this year. Writes ETV Bharat's Krishnanand Tripathi.

New Delhi:The Union government on Thursday released a balance amount of Rs 44,000 crore to States and Union Territories with Legislature under the back-to-back loan facility in lieu of GST compensation, said the finance ministry.

This is the third time when the Centre has released GST compensation to States and UTs as back-to-back loan in the current financial year, taking the total amount of such loans to Rs 1.59 lakh crore this year.

Earlier, the Centre released Rs 75,000 crore in July this year and later Rs 40,000 crore were released to States and UTs in October, taking the total amount released in the first two installments to Rs 1.15 lakh crore.

The total amount of Rs 1.59 lakh crore, which has so far been paid to the States and UTs as a back-to-back loan to meet the shortfall in their revenue collection, is in addition to the bi-monthly payment of GST Compensation from the actual GST Compensation Cess collected by the Centre.

“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 and UTs with Legislature during this financial year,” said the finance ministry.

According to the ministry’s calculation, the amount of Rs 2.59 lakh crore is expected to exceed the amount of GST compensation collected in the current financial year.

In the 43rd meeting of the GST Council in May this year, both the Centre and States agreed that the Centre will borrow Rs 1.59 lakh crore in the current fiscal and release it to States and UTs to meet the shortfall as the Covid-19 induced weakness in the revenue collection was likely to persist this year as well.

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Why does the Centre pay GST Compensation to States?

Under the GST Compensation to States Act of 2017, the Centre is constitutionally obliged to meet any shortfall in any State or UT’s revenue collection for a period of five year.

In order to persuade the States and UTs, the Centre promised to compensate them for any shortfall in collection of those State taxes and duties that have been subsumed in the Goods and Services Tax.

The amount of compensation is calculated assuming a 14% yearly growth in a State’s revenue collection by taking its revenue collection in FY 2015-16 as base. Under the law, the amount of compensation to be paid to States and UTs is compounded every year.

Any shortfall in a State’s revenue collection is calculated and settled on bi-monthly basis and the total amount of GST compensation to be paid to a State in a year is ascertained by the Comptroller and Accountant General (CAG).

Why Compensation is paid as a loan?

Under the GST law, the Centre collects GST Compensation Cess to compensate the States and UTs for any revenue loss subsequent to implementation of the GST in July 2017.

The law says that the Centre will compensate states for a period of five years. The facility that started from July 2017 will come to an end in June next year.

For the first three years, the Centre did not face any serious difficulty in paying the GST compensation to States from the GST Cess collection.

However, due to the outbreak of Covid-19 global pandemic, the Centre’s revenue collection and GST Cess collection tanked last year. It forced the Centre to persuade States and UTs to accept the payment of GST Compensation as a back-to-back loan facility created with the help of the Reserve Bank of India.

These loans will be later repaid by the Centre by extending the period of GST Cess collection beyond 2022.

How much did the Centre pay last year?

In FY 2020-21, the Centre had adopted the similar principle of arranging back-to-back loans to States and UTs to bridge the shortfall in payment of GST compensation to States.

Last year, the Centre released an amount of Rs 1.1 lakh crore to States and UTs as a back-to-back loan facility.

With today’s release of Rs 44,000 crore to States and UTs, the Centre has released a cumulative amount of Rs 2.69 lakh crore as back-to-back loan facility in the two financial years – FY 2020-21 and FY 2021-22.

Officials said all eligible States and UTs have agreed to the arrangements of funding of the compensation shortfall under the back-to-back loan facility.

The Centre has frontloaded the release of assistance under the back-to-back loan facility to States so that they can maintain their capital expenditure during the ongoing pandemic which has killed more than 4,56,000 people in the country so far and nearly 5 million people worldwide.

How the Centre arranged Rs 44,000 crore?

The Centre has arranged the amount of Rs 44,000 crore, which has been released today, by issuing five year Government of India securities at an average rate of 5.69%.

Officials said the Central Government will not have to borrow any additional money from the markets on this account.

“It is expected that this release will help the States and UTs in planning their public expenditure among other things, for improving health infrastructure and taking up infrastructure projects,” said the finance ministry.

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