Lok Sabha Question No. 25 (UNSTARRED), answered on 2020-09-14
Subject: GST Shortfall
Ministry: FINANCE
Asked by: Lavu Sri Krishna Devarayalu, Midhun Reddy, Balashowry Vallabbhaneni, Kotagiri Sridhar, M V V Satyanarayana, Kuruva Gorantla Madhav, Adala Prabhakara Reddy, Magunta Sreenivasulu Reddy, Pocha Brahmananda Reddy

## GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE

LOK SABHA UN-STARRED QUESTION NO.25 TO BE ANSWERED ON MONDAY, THE 14 TH SEPTEMBER, 2020 BHADRAPAD 23, 1942 (SAKA)

## GST Shortfall

25.  SHRI  LAVU  SRI  KRISHNA  DEVARAYALU,  SHRI  P.V.  MIDHUN  REDDY,  SHRI BALASHOWRY  VALIABHANENI,  SHRI  SRIDHAR  KOTAGIRI,  SHRI  M.V.V. SATYANARAYANA,  SHRI  KURUVA  GORANTLA  MADHAV,  SHRI  ADALA PRABHAKARA  REDDY,  SHRI  MAGUNTA  SREENIVASULU  REDDY,  SHRI POCHA BRAHMANANDA REDDY

Will the Minister of FINANCE be pleased to state:

- (a) whether the Union Government has proposed two options to the states to meet the Rs.2.3 lakh  crore  shortfall  by  borrowing  in  2020-21  only  to  meet  the  shortfall  related  to  GST implementation  (Rs  97,000  crore).  with  the  rest  payable  after  2022  from  surplus  cess

collections, or borrow in 2020-21 to meet the entire shortfall; (b) if so, the details thereof; (c) whether the State Governments will be able to individually exercise their options and if so, the details thereof; (d)  whether  it  is  true  that  for  the  financial  year  2020-2021,  the  Central  Government  has approved a revised fiscal  deficit  limit  of  5  per  cent  of  GSDP,  of  which  1  percent  of  GSDP  is contingent on implementation of certain reforms by States; and

- (e) if so, the details of proposed reforms?

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

(a) to (c): As per provision in Section 7, 8 & 10 of the GST (Compensation to States) Act, 2017, the  issue  of  pending  GST  compensation  and  future  course  of  action  to  meet  the  GST compensation shortfall has been discussed in 41st 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 pre-conditions. 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 reform-linked 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.

(d) & (e): In view of unprecedented COVID-19 pandemic, additional borrowing limit of up to 2% of Gross State Domestic Product (GSDP) over and above normal borrowing limit of 3% of GSDP has been allowed to the States for the year 2020-21. Out of this limit 2% of GSDP, 1% of GSDP is linked to following reforms by the State:

- a) Implementation of One Nation One Ration Card System;
- b) Ease of doing business reform;
- c) Urban Local body/utility reforms;
- d) Power Sector reforms

Weightage of each reform is 0.25% of GSDP totalling to 1%. The remaining borrowing limit of 1% will be released in two instalments of 0.50% each - first immediately to all the States as untied, and the second on undertaking at least 3 out of above 4 reforms.

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