States get last tranche of Centre’s ‘GST shortfall’ loan; here are the details

Since its launch in July 2017, the Goods and Services Tax (GST) regime has seen its ups and downs. The revenue mop-up has not always been in line with estimates, and the required compensation has caused much friction among the Union and State governments.

Due to pandemic-related financial stress, the Centre had agreed to raise loans and release them to States and Union Territories (UTs) with legislatures (such as Delhi) this fiscal. In line with this, on Thursday, it released ₹44,000 crore to States and UTs.

With this, it completed the transfer of ₹1.59 lakh-crore, which is the estimated compensation shortfall this fiscal. This is over and above the compensation of over ₹1 lakh-crore that is estimated to be released to States and UTs, sourced from cess collections. The latter amount is distributed in tranches every two months.

“The sum total of ₹2.59 lakh crore is expected to exceed the amount of GST compensation accruing in FY 2021-22,” said the Finance Ministry in a statement.

What’s different this year

This fiscal, the Centre has met its GST compensation obligations rather early, with five months to go for year-end (March 2022). In FY 2020-21, ₹1.1 lakh-crore was transferred to States in smaller instalments at a more relaxed pace.

“It is expected that this release will help the States/UTs in planning their public expenditure among other things, for improving, health infrastructure and taking up infrastructure projects,” the Finance Ministry said. It is surmised that the COVID-related disruptions — which the States have to address both in terms of improved health infrastructure and economic support — may have prompted the Centre to release the funds earlier this year. For this reason, the funds are considered ‘frontloaded’.

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The Centre’s tax mop-up has risen this fiscal due to an increase in direct tax (such as income-tax) revenues. Several States and UTs are, however, facing a severe financial crunch. The estimated GST compensation shortfall has been released across three tranches this financial year — ₹75,000 crore on July 15, ₹40,000 crore on October 7 and ₹44,000 crore on October 28.

Where the funds are coming from

The ₹44,000 crore that the Centre has just released has been sourced via Government of India securities issued this fiscal. These have a five-year tenure, and come with a weighted average yield of about 5.7%. The Centre estimates that it will not require any additional market borrowing as a result of this fund release.

At ₹5,010.90 crore, Karnataka is the largest recipient of these funds. Second comes Maharashtra at ₹3,814 crore, followed by Gujarat at ₹3,608.53 crore and Punjab at ₹3,357.48 crore. The funds released to these four States constitute one-third of the total loan amount.

The 43rd GST Council meeting, held on May 28, 2021, had decided that the Centre would borrow ₹1.59 lakh-crore this fiscal, to be used exclusively for release to States and UTs. The loans would be given back-to-back to help the States and UTs meet the resource gap “due to the shortfall in compensation on account of inadequate amount collected in the GST compensation fund”.