“The interest rate will be reasonable,” Finance Minister Nirmala Sitharaman said in her note to states.
New Delhi:
After four months of confrontation over GST (Goods and Services Tax) contributions, the central government decided to borrow up to ₹ 1.1 lakh crore on behalf of the states. Finance Minister Nirmala Sitharaman, in a letter to the states, explained the reason for the turnaround.
“Based on the suggestion of many states, it has now been decided that the central government will initially receive the amount and then return it to the states as a loan. This will facilitate the coordination and simplicity of loans, in addition to ensuring a favorable interest rate, ”explains the Minister of Finance.
A downturn in the economy led to a decline in GST collections, wreaking havoc on the budgets of states that had waived their right to collect local taxes such as sales tax or value added tax.
To compensate for the shortfall, loans on the market have been offered. In a statement, the Union’s finance ministry said states were given a special window to borrow 1.1 lakh crore over their existing limits to cover the deficit. The money will now be borrowed by the center and passed on to the states.
Nirmala Sitharaman said the amount of resources available to states was sufficient to cover the full amount of compensation that would have been payable this year.
“The interest rate will be very reasonable. The interest and principal will be covered by the future proceeds of the termination,” his note said.
The full compensation backlog would ultimately be paid to the states, the minister said. She said she was “sensitive to the fact that states need to be protected from the adverse consequences of increased borrowing in the form of interest liabilities and increased debt.” The center would therefore organize the borrowing in such a way that the cost was equal to or close to the central government’s interest rate.
The center borrowing on behalf of the states will likely ensure that a single borrowing rate is charged, which would also be easy to administer.
The loan, “will have no impact on the budget deficit of the Indian government”, says a statement
When the GST was introduced in July 2017, states were promised additional revenues of 14% over their last tax revenues during the first five years of deployment. This was to be done through a levy or surcharge on luxury and sin products, but these collections have failed in recent months.
To compensate for this, the center had suggested that states borrow against future compensation revenue. But this was not acceptable for opposition-led states.
Paying GST compensation to states has become an issue after cessation revenues started to decline since August of last year. The Center had to dip into the excess amount collected in 2017-2018 and 2018-2019.
