Lok Sabha Question No. 158 (UNSTARRED), answered on 2020-09-14
Subject: GST Compensation
Ministry: FINANCE
Asked by: Prasun Banerjee

## GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE

LOK SABHA UN-STARRED QUESTION NO.158 TO BE ANSWERED ON MONDAY, THE 14 TH SEPTEMBER, 2020 BHADRAPAD 23, 1942 (SAKA)

## GST Compensation

## 158.  SHRI PRASUN BANERJEE:

Will the Minister of FINANCE be pleased to state:

- (a) the details of Government's plan to give due GST compensation to the States for first quarter of 2020;
- (b) whether the Government has any plan to borrow from market to fulfill the demand of States for GST compensation; and
- (c) If so, the details thereof?

## ANSWER MINISTER OF STATE IN MINISTRY OF FINANCE (Shri Anurag Singh Thakur )

(a) to (c): As per Section 7 & 8 of the GST (Compensation to States) Act, 2017, the States are required to be compensated for loss of revenue due to implementation of GST from the proceeds of the GST compensation Cess being levied on certain luxury items and demerit goods during the transition period.  As per provisions in section 10 (1) of GST (Compensation to state) Act,  2017,  GST  Compensation cess has been credited into non lapsable Fund  known  as  GST  Compensation  Fund  in  Public  Account  of  India. Section  10(2)  of  the  said  Act,  2017  provides  that  payment  of  GST compensation shall be made out of compensation fund.

However, the GST compensation cess collected in current FY 202021 is not sufficient to release the admissible GST compensation for period April-July, 2020.

Accordingly,  the  issue  of  pending  GST  compensation  and  future course  of  action  to  meet  the  GST  compensation  shortfall  has  been discussed in 41 st GST Council meeting on 27.08.2020 wherein States were given two options to meet their GST compensation shortfall for current FY from market borrowing viz

## Option 1

- I. The shortfall arising out of GST implementation (calculated  at  Rs. 97,000 crores approximately) will be borrowed by States through issue of  debt  under  a  Special  Window  coordinated  by  the  Ministry  of Finance.
- II. It  will  be  the  endeavour to ensure steady flow of resources similar to the flow under GST compensation on a bi-monthly basis.
- III. The GOI will endeavour to keep the cost at or close to the G-sec yield, and in the event of the cost being higher, will bear the margin between G-secs and average of State Development Loan yields up to 0.5% (50 basis points) through a subsidy.
- IV. A special borrowing permission will be given by the GOI under Article 293 for this amount, over and above any other borrowing ceilings eligible under any other normal or special permission notified by Department of Expenditure .
- V. In  respect  of  Union  Territories  (including  National  Capital  Territory), suitable arrangements to ensure flow of resources under the Special Window to them would be made by the Government of India
- VI. The interest on the borrowing under the Special Window will be paid from  the  Cess  as  and  when  it  arises  until  the  end  of  the  transition period.  After  the  transition  period,  principal  and  interest  will  also  be paid  from  proceeds  of  the  Cess,  by  extending  the  Cess  beyond  the transition  period  for  such  period  as  may  be  required. The State will not be required to service the debt or to repay it from any other source.
- VII.  States will also be given permission to borrow the final instalment of 0.5% (originally intended as a bonus for completing at least three of the  four  specified  reforms)  allowed  in  para  4  of  the  Department  of

Expenditure's OM F.No. 40(06)/PF-S/2017-18 dated 17-5-20 (hereinafter  referred  to  as  DOE  OM)  even  without  meeting  the  preconditions.  This  will  enable  borrowing  of  approximately  Rs.  1  lakh crores in aggregate.

- VIII. The  first instalment of 0.5%  unconditional borrowing permission granted vide para 4 of the DOE OM remains unaffected. The reformlinked  tranches  specified  in  paras  5  to  8  of  that  OM  also  remain unaffected.
- IX. In modification of para 9 of the DOE OM, States will be able to carry forward unutilised extra borrowing ceilings given under that OM to the next financial year; the instalments under para 4 (0.5 unconditional + another 0.5 as per para VII above) can be carried forward unconditionally; the reform-linked portions can be carried forward if the States meet the reform criteria within the dates already prescribed for this year.
- X. The borrowing under the Special Window will not be treated as debt of the State for  any norms which may be prescribed by the Finance Commission etc.
- XI. The Compensation Cess will be continued after the transition  period until such time as all arrears of compensation for the transition period are  paid  to  the  States.  The  first  charge  on  the  Compensation  Cess each year would be the interest payable; the second charge would be the  principal  repayment.  The  remaining  arrears  of  compensation accrued  during  the  transition  period  would  be  paid  after  the  interest and principal are paid.

## Option 2

- I. The entire shortfall  of  Rs  235,000  crores  (including the Covid-impact portion) may be borrowed by States through issue of market debt. The GOI will  issue  an  OM  committing  to  repayment  of  principal  on  such debt from Cess proceeds  as per para IV below.
- II. Appropriate  enhanced  special  borrowing  permission  will  be  given  by the  GOI  under  Article  293  based  on  the  following  methodology,  in modification of scheme notified earlier under the DOE OM:
- a.  Each state's borrowing limits for the year will be based on the following calculation:

Basic  eligibility  (3  %  of  GSDP)  +  Amount  allowed  for shortfall  as  per  Item  I  above    of  Option  2+  up  to  1%  of GSDP (reform-linked as per paras 5 to 8 of DOE OM)

or

Basic eligibility (3% of GSDP) + 1% of GSDP + up to 1% of GSDP (reform-linked as per paras 5 to 8 of DOE OM) whichever is higher.

- b.  The  additional  unconditional  borrowing  limit  of  0.5%  and  the final (bonus) tranche of 0.5% under para 4 of the DOE OM will not be separately available, being subsumed under the calculation above.
- c.  States  will  remain  eligible  for  the  reform-linked  tranches  of borrowing under paras 5 to 8 of the DOE OM this year but shall not  be  eligible  to  carry  them  forward.  The  maximum  amount which can be availed under that OM shall stand reduced to 1% of GSDP instead of 2% of GSDP.
- III.  The interest shall be paid by the States from their resources.
- IV.  The principal on the amount under Item I above will, after the transition period,  be  paid  from  proceeds  of  the  Cess. The  States  will  not  be required to repay the principal from any other source .
- V.  To the extent of the shortfall arising due to implementation of GST (i.e. Rs. 97,000 crores approximately in aggregate) the borrowing will not be treated as debt of the State for any norms which may be prescribed by the Finance Commission etc.
- VI.  The Compensation Cess will be continued after the transition period until such  time  as  all  arrears  of  compensation  for  the  transition  period  are paid  to  the  states.  The  first  charge  on  the  future  Cess  would  be  the principal  repayment.  The  remaining  arrears  of  compensation  accrued during the transition period would be paid after the principal is paid.

It  was  also  decided  that  States  will  give  their  preference  and  views thereon. Thereafter on finalisation of scheme, the states can chose either Option  1  or  Option  2  and  accordingly  their  compensation,  borrowing, repayment etc will be dealt as per their individual choice.

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