Centre revises H2 borrowing calendar to accommodate GST compensation

The central government late on Thursday said it was modifying its borrowing calendar for the second half to operationalise a special borrowing window meant for states to bridge their Goods and Services Tax (GST) revenue gap.

Accordingly, the Centre will borrow a total of ₹4.88 trillion for the period starting 19 October to 31 March, said an official statement. This indicates that the total borrowing for the Centre for the current fiscal will stand at ₹13.1 trillion, compared to ₹12 trillion it said on 30 September.

“To operationalize the special window to states for meeting the GST compensation cess shortfall of ₹1,10,000 crore, the government of India’s borrowing calendar is being modified in consultation with the RBI,” said an official statement.

The additional amount for meeting the GST compensation shortfall shall be raised equally at the rate of ₹55,000 crore under the three year and five year tenors, it said.

As per the earlier calendar issued on 30 September, Centre was to raise ₹56,000 crore in two tranches on 5 October and 12 October, which takes the total second half borrowing to ₹5.44 trillion. The Centre had already borrowed ₹7.66 trillion in the first half.

Earlier in the evening, the Centre made public the modality for facilitating states to meet their revenue shortfall this fiscal arising from the GST roll out three years ago. As per this, Centre will borrow under the RBI special window and lend the same to states.

The borrowings will be shown as debt in the books of states and the Centre’s fiscal deficit will be unaffected, it said in a statement. So far 21 states and two union territories—Delhi and Jammu and Kashmir--have opted for this option to bridge their GST revenue shortfall this year. The statement said the GST revenue shortfall of ₹1.1 trillion will be borrowed by central government in appropriate tranches and will be passed on to states “as a back-to-back loan in lieu of GST Compensation cess releases.”

“The decided option is an iteration to the earlier proposed option 1 by the central government; with this seemingly aiding in operational convenience and uniformity in interest rate on the proposed borrowing. It would need to be seen now if the same is acceptable to all the states,” said Abhishek Jain, tax partner, EY.

Soon after the Centre made public the modality for facilitating states to meet their revenue shortfall, Kerala finance minister Thomas Isaac said he welcomed the announcement that Centre will borrow through the special window and provide back-to-back loans to states in lieu of GST compensation.

“But there is one issue yet to be resolved- how much of compensation is to be deferred to 2023? Negotiate this point and reach a consensus,” he said in a tweet. Isaac also said that states should be provided full compensation payment of ₹2.3 trillion this year itself. He also suggested that since under the new arrangement, additional borrowing does not affect the fiscal deficit of the Centre, there was no reason for it to hesitate to borrow the entire amount.