The Eighth Instalment of Rs. 6,000 crore by Ministry of Finance as GST Compensation for States

The Central government borrows the funds under a special window and passes it on to states in a back-to-back loan arrangement.

"The Centre has released the eighth instalment of Rs. 6,000 crore as GST compensation payment to states," the government said on Monday. So far states and union territories have received Rs. 48,000 crore of the Rs. 1.1 lakh crore to be disbursed by the Centre this fiscal.

The government said: "the Central government borrows the funds under a special window and passes it on to states in a back-to-back loan arrangement. The interest rate for the latest loan instalment was 4.19%, while the average rate for the entire borrowing so far is at 4.7%."

While 23 states have been allotted Rs. 5,516.6 crore in this round of weekly instalment, the remaining Rs. 483.4 crore has been released to the three union territories with legislative assemblies (Delhi, Jammu & Kashmir & Puducherry) which are members of the GST Council.

"The remaining five States, viz Arunachal Pradesh, Manipur, Mizoram, Nagaland and Sikkim, do not have a gap in revenue on account of GST implementation," the government said.

To make up any shortfall below the states’ protected revenue each year, the GST system has a mechanism of a compensation cess fund, which is made up of cess proceeds,. This guarantee of revenue protection is baked into the law and states are entitled to a 14% y-o-y growth in their GST revenue.

However, the compensation cess fund has proved to be inadequate since last year. The Central government proposed this year that it would pay states through market borrowing, but many states didn’t agree with the shortfall estimate of Rs 1.1 lakh crore.

The Centre insisted that it would only pay for the shortfall due to GST implementation and not Rs 1.85 lakh crore, which is the revenue deficit taking into account the pandemic-induced slowdown. After initial logjam, all the states eventually came on board with the borrowing scheme.

The Central government has also granted additional borrowing permission equivalent to 0.5% of Gross States Domestic Product (GSDP) to states choosing option-I to meet GST compensation shortfall to help them mobilise additional financial resources.

“All the states have been given their preference for option-I. Permission for borrowing the entire additional amount of Rs 1,06,830 crore (0.5% of GSDP) has been granted to 28 states under this provision,” the government said.