Finance Ministry says entire GST dues to be paid to States

New Delhi: The Centre has reached out to the states again clarifying that it would pay entire GST compensation dues to them amid the mounting opposition over the borrowing options proposed in lieu of the shortfall in indirect tax collections.

Sources in the Finance Ministry said that the entire shortfall of compensation to the states — irrespective of whether it is on account of the GST implementation or Covid pandemic — will be compensated and the same has been communicated to the states again.

It has never been the stand of Union Finance Minister that the loss of revenue due to Covid would not be compensated. The Central government has, time and again, committed that the entitlement of the states would always be for full compensation.

The entire compensation sum on account of shortfall in collections of Goods and Services Tax (GST) will be paid and honoured, a top government source said.

Under the two options given to the states towards settlement of the GST compensation, the first option provides option to borrow by states and under a special dispensation from the RBI for a sum of about Rs 97,000 crore this year.

This is the amount of shortfall calculated by the Centre that is directly on account of the GST implementation. The option two allows states to borrow from market the entire expected GST compensation shortfall of about Rs 2,35,000 crore in FY21.

States have been asked to return with their views on the options so that the scheme could be operationalised.

Doubts arose over the option 1 with few states saying that GST compensation would be paid to states only for the shortfall arising due to the implementation of the new indirect tax regime and not the shortfall arising due Covid-19 disruptions.

Finance Ministry sources said that working out the revenue shortfall on account of GST implementation is just a mechanism to assess how much of the shortfall should be met by borrowing and how much could be deferred. Borrowing for meeting the entire shortfall when the private sector is struggling to stand back on its feet could hurt them badly.

If states go for option 1 and borrow Rs 97,000 crore, it does not mean they will have to forego the remaining compensation. The remaining compensation will be paid to the states after the above borrowing has been fully repaid. Therefore, where is the doubt about the Centre not meeting its commitment?, asked a top Finance Ministry official.

The plan is to to extend compensation cess beyond the five year transition period that ends in June, 2022. The cess collected in the extended period would entirely go towards the settlement of the compensation dues that arose during the period of transition under the formula put on the GST Act.


NT Bureau