Union Government Releases Rs 75,000 Crore To States As GST Compensation For Current Fiscal Year

The Union Finance Ministry announced on Thursday (Jul 15) that it has released ₹75,000 crore to the states and union territories under the back-to-back loan facility in lieu of Goods and Services Tax (GST) Compensation.

The finance ministry said that the release will be in addition to normal GST compensation being released every 2 months out of actual cess collection.

For the current fiscal year, compensation shortfall is estimated at ₹2.69 lakh crore, for which ₹1.11 lakh crore is expected to be funded from compensation cess collection, while remaining is to be paid through borrowings.

Compensation cess was introduced as relief measure for States for the loss of revenues arising from the implementation of GST. States, in lieu of giving up their powers to collect taxes on goods and services after local levies were subsumed under the GST, were guaranteed a 14 per cent tax revenue growth in the first five years after GST implementation by the Central government.

States’ tax revenue as of FY16 is considered as the base year for the calculation of this 14 per cent growth.

The Centre was able to pay full compensation for the first three years of GST. However the economic contraction due to lockdown imposed to contain the spread of Covid-19 epidemic resulted in insufficient cess collection to provide for guaranteed compensation.

"For effective response and management of COVID-19 pandemic and a step-up in capital expenditure all States and UTs have a very important role to play. For assisting the States/UTs in their endeavour, Ministry of Finance has frontloaded the release of assistance under the back-to-back loan facility during FY 2021-22 ₹75, 000 crore (almost 50 % of the total shortfall for the entire year) released today in a single instalment. The balance amount will be released in the second half of 2021-22 in steady instalments." the finance ministry said in a statement.

"All eligible States and UTs (with Legislature) have agreed to the arrangements of funding of the compensation shortfall under the back-to-back loan facility." the statement added.

During the 43rd GST Council Meeting held in May, Centre and States jointly agreed that ₹1.59 lakh crore will be borrowed and released to States and UTs with Legislature to meet the resource gap due to the short release of Compensation on account of inadequate amount in the Compensation Fund. This amount is as per the principles adopted for a similar facility in FY 2020-21, where an amount of ₹1.10 lakh crore was released to States under a similar arrangement.

The release of ₹75,000 crore being made now is funded from borrowings of Government Of India( GoI)in 5-year securities, totalling ₹68,500 crore and 2-year securities for ₹6,500 crore issued in the current financial year, at a Weighted Average Yield of 5.60 and 4.25 percent per annum respectively.