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GST Compensation: Centre Gives In To States’ Protest, To Borrow 1.1 Lakh Crore

The states accepted the GST regime in July 2017 on the condition that the central government will compensate for any shortfall in revenue collection for the next 5 years.

 

New Delhi| To meet the shortfall in the Goods and Services Tax (GST) revenue, the central government itself will raise a loan of Rs 1.1 lakh crore from the states, the Finance Ministry announced on Thursday. This is considered an important step towards resolving the issue of GST compensation which has become a matter of dispute between the Center and some states.

The Goods and Services Tax (GST) collection has been low for the last few months since the economy has slid into deep slowdown due to Covid-19 crisis. This has upset the budget of the states. States had accepted GST in lieu of local taxes and duties including VAT. The states accepted the new indirect tax regime in July 2017 on the condition that the central government will compensate for any shortfall in revenue collection for the next five years. States were given the option to borrow from the market to meet this shortfall. But some states did not agree with this.

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The ministry said that the amount borrowed will be given to the states in return for issuing GST compensation cess. Uniformity in bond returns and gaps in bond auctions will be ensured while taking loans from the Government of India. A senior finance ministry official said that principal and interest will be paid from the Compensation Fund. At the same time, an amount of Rs 1.10 lakh crore will be raised by issuing bonds for a period of three to four years.

In a statement issued by the Finance Ministry, it said that in addition to the existing loan limit provided to the states to meet their spending requirements, special arrangements were offered for taking a loan of Rs 1.10 lakh crore. The statement said, “Under the special arrangement, the Government of India will take loans in suitable instalments for revenue compensation of an estimated Rs. 1.10 lakh crore (assuming that all states will be involved) in the GST revenue collection”.

Under the Self Reliant India Package, the borrowing limit of states was increased from 3 per cent of their GSDP to 5 per cent. Thus they have already been provided with the facility of taking two per cent additional loan of GSDP.

 

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