Centre may raise loan to pay shortfall of GST compensation amount to States

States have to ramp up spending to combat the outbreak of COVID-19

April 13, 2020 04:03 pm | Updated 04:33 pm IST - NEW DELHI

The Union government is exploring raising a loan to pay the shortfall of the Goods and Services Tax (GST) compensation amount to States as the latter have had to ramp up spending to combat the outbreak of COVID-19.

According to senior officials in the Finance Ministry, the idea has been circulated and since the GST Act prohibits withdrawal of funds from the Consolidated Fund, raising loans is being seen as a way out. “We will either need to call a video conference of the GST Council or ask States in writing whether they are on board on this,” said a senior government source.

According to Krishna Byre Gowda, former Minister for Agriculture in the Karnataka government and part of the GST Council when the Act was drafted under the aegis of the then Finance Minister Arun Jaitley, this route can be explored quite legitimately by the government of India.

“A discussion had been held earlier on how to address if there was a revenue shortfall. There were concerns over what if cess accruals were not adequate to pay the shortfall. The government of India was adamant in resisting suggestions to pay the shortfall from the Consolidated Fund of India and at that point the option of raising a loan on the cess account was discussed and agreed as an option, and the loan accrued would be paid from cess accruals in the future,” he said.

“Given the extraordinary situation we are in, the government can invoke the provision made in law and raise a loan. They can either have a video conference of the Council or get the opinion of the States in writing,” he said.

In the last GST Council meeting, in fact, Deputy Chief Minister of Gujarat Nitin Patel had floated the idea of the Council itself raising loans but the Council as an entity cannot do that. “The option that was raised by States was to extend the compensation period from 2022 to five more years,” said a source. Much mulling over this has led the government to the third option of raising loans.

For December 2019 and January 2020, the Central government owes around ₹30,000-35,000 crore as compensation and around ₹30,000 crore for February and March. The government had last week released ₹14,103 crore to States as the second tranche of compensation for October and November 2019. It paid ₹19,950 crore in February for these two months.

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