GST shortfall: Central government borrows Rs1.1lakh Crores

GST shortfall: Central government borrows Rs1.1lakh Crores

Government of India has decided to borrow loan of Rs 1.1lakh crores on behalf of the states to meet the GST shortfall of this year. A downturn in the economy since the last fiscal year has led to a decrease in the collection of Goods and Services Tax (GST), disrupting the budgets of states that, when GST was implemented in July 2017, had given up their right to levy local taxes such as sales tax or VAT. The overall GST collection shortfall is estimated at Rs 2.35 lakh crore. Out of the overall shortfall, Rs 1.1 lakh crore is attributed to the shortfall in GST.

There were two options in front of the states to meet the shortfall in the GST:

  1. The States may be provided with a special window, in consultation with the Reserve Bank of India, at a fair interest rate of Rs 1.1 lakh crore for borrowing. The balance of the load to be repaid from cess collection within the time frame of five years from the day of GST implementation, ending in 2022.The borrowing cap amounting Rs 1.1 lakh crore was raised in place of Rs 97,000 crore by GST panel.
  2. To take loan for the entire amount of GST shortfall of Rs 2.35lakh crores.

“The Centre has sticked to its ground and borrowing in its name is only for operational convenience and it should not be construed as the Centre yielding to the states,” 

 Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors

Reasons for the shortfall

Benefit from taxation is a feature of economic activity. Higher growth in operation indicates higher revenue, while lower growth means lower revenue. There was minimal activity under the current conditions, in which almost 65 percent of the economic sectors were closed during the pandemic. Tax revenues have therefore been adversely affected. Both direct taxation and indirect tax have been effected badly. Examples of direct tax can be income and corporate taxes and indirect taxes can be taxes on customs and goods and services. As soon as the financial activities takes a hike , the revenues will go back to the pre- pandemic levels.

What will be the effects of this loan?

This loan will not cause any effect on the government’s fiscal deficit. The sum would be reflected in the state government’s capital receipts and as part of the funding of its respective fiscal deficits, the Ministry of Finance said. It is possible that the Centre would borrow on behalf of the States to ensure that a single borrowing rate is paid and that this will also be easy to administer.

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