Centre gives in, says will borrow to make up for states’ GST shortfall

News: The Central government has decided to borrow up to Rs 1.1 lakh crore on behalf of the states to meet the shortfall of Goods and Services Tax(GST) compensation.

Facts:

• Borrowing Mechanism: Under the Special Window, the estimated shortfall of Rs 1.1 lakh crore will be borrowed by Centre in appropriate tranches.The amount so borrowed will be passed on to the States as a back-to-back loan in lieu of GST Compensation Cess releases.
• Will the borrowing impact the fiscal deficit of the Centre? The borrowing will not have any impact on the fiscal deficit of the Centre as the amounts will be reflected as the capital receipts of the States and as part of the financing of its respective fiscal deficits.
• Significance: The Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.

Additional Facts:

• GST Compensation Cess: Under the GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years between 2017 and 2022.At present, the cess levied on products considered to be ‘sin’ or luxury goods.