With Covid-19 disruptions making it impossible for the Central government to meet its obligation to provide compensation under the Goods and Services Tax (GST) law to states this year, the Centre proposed two options to the states to cover their compensation gap and meet their expenditure requirements.

While addressing the media after chairing the 41st GST Council meeting, finance minister Nirmala Sitharaman said that the first option is to provide a special borrowing window to states, in consultation with the RBI, to provide Rs 97,000 crore at a “reasonable” interest rate.

The money, the minister said, can then be repaid after 5 years from collection of cess.

“The Centre will give a further relaxation of 0.5 per cent in states’ borrowing limit under the FRBM Act as the second leg of the first option. This will allow states to borrow more unconditionally to cover their compensation shortfall. States can choose to borrow more, beyond the expected compensation itself, since that is the injury caused by the pandemic,” said the finance minister.

The second option the government proposed is to meet the entire GST compensation gap this year itself through borrowings after consulting the RBI.

“We very clearly said in both the options… that we shall facilitate talking to the Reserve Bank and getting it at a G-Sec proportionate number of years linked rate for all the states so that each state does not have to go running for the loan and face different situations and in the process the bond yields (turn) higher. “So we said we will facilitate it, but the borrowing can be done in the name of the states and all states roughly can get the same rate of interest,” said Sitharaman.

The states have been given seven days’ time to come back with their views on the options listed by the Centre, so that a mechanism could be put in place as an exception this year to meet the fund needs of the states.

“As soon as an arrangement is agreed upon by the GST Council, the Centre will clear the pending bimonthly compensation.

The compensation amount due for April-July period stands at Rs 1.50 lakh crore. This year we are facing an extraordinary situation… we are facing an act of God which might even result in a contraction of the economy, to what per cent I am not getting into that. Therefore, we said that portion (of compensation) which strictly is hardwired in the (GST) Act, we will arrange, give it to you…,” said Sitharaman.

As per the Finance Ministry, the GST compensation gap in FY21 is expected to be a staggering Rs 2.35 lakh crore. This is as the Centre expects to collect a mere Rs 65,000 crore from GST cess due to Covidimpacted, subdued economic activity.

Finance Secretary Ajay Bhushan Pandey shared that the current year has seen a slowing down of the economy due to Covid19 which has led to low GST collections. Recently, nonNDA-ruled states had asked for compensation of the GST revenue shortfall.

Citing a legal opinion from the Attorney General, Pandey is of the view that compensation needs to be paid to states for five years, but this gap has to be met from the levy of cess. “Compensation cannot be paid from Consolidated Fund of India,” said Pandey.