The Union finance ministry on Saturday formally proposed two options for borrowings to meet the shortfall of of Rs 2.35 lakh crore in goods and service tax compensation for the financial year of 2020-’21 to states. The states have been given seven days to examine the options and revert with their choice.

At the end of the five-hour long 41st GST Council meeting on Thursday, Union Finance Minister Nirmala Sitharaman briefed the media to say that states have been offered two borrowing options to make up for the revenue shortfall under GST. The finance ministry has estimated this shortfall at Rs 2.35 lakh crore in the financial year 2020-’21 because of the severe impact of the pandemic.

The first option is that the states may borrow the full compensation deficit of Rs 2.35 lakh crore via a special window in consultation with the RBI. The second option entailed borrowing the entire projected shortfall of Rs 2.35 lakh crore this year, facilitated by the central bank.

In a statement released on Saturday, the finance ministry shared the details of the proposal and said states can individually choose one of the options according to their compensation, borrowing and repayment capacities. The ministry said it will hold a meeting with state finance secretaries on Tuesday to clarify issues if any, about the borrowing options.

In the first option, state borrowing will be limited to the shortfall owing to GST implementation of Rs 97,000 crore as calculated by the finance ministry – and not because of the coronavirus pandemic – which will be provided through a special window. The loan will not be counted as state debt, which means that the principal and interest will be paid from the compensation cess fund.

The finance ministry added that the government will endeavour to keep the cost at or close to the G-sec yield. In case the cost is higher, the government will “bear the margin between G-secs and average of State Development Loan (SDL) yields up to 0.5% (50 basis points) through a subsidy,” it said.

In the second option, states will have to bear the interest burden if they decide to borrow the entire Rs 2.35 lakh crore – the shortfall owing to GST implementation of Rs 97,000 crore, and impact of Covid 19- induced economic slowdown. “The interest shall be paid by the States from their resources,” the finance ministry said.

The principal on the amount after the transition period, however, will be paid from proceeds of the cess. “States will not be required to repay the principal from any other source,” it added.

This means that under the first option, borrowing via the special window will not be considered as debt of states, while in the second option, only the shortfall in revenue of Rs 97,000 crore because of GST implementation will not be treated as debt, but the rest of the amount will be.

The ministry said that under the first option, the Fiscal Responsibility and Budget Management Act limit will be raised by an additional 0.5% of gross state domestic product, or GSDP.

Besides this, another 0.5%, currently intended as a bonus for completing at least three of the four specified reforms, will be given “even without meeting the pre-conditions”. “This will enable borrowing of approximately Rs 1 lakh crores in aggregate,” the statement said.

However, in the second option, the unconditional increase of 0.5% of states’ FRBM borrowing limit would not be available, and states will not be allowed to carry forward “unutilised extra borrowing ceilings” to the next financial year, the finance ministry said.

The Centre further clarified that it was only to compensate states for loss of revenue only “arising on account of implementation of GST”.

“This year the Indian economy, nay the global economy, is suffering from an exogenous shock, namely the Covid-19 pandemic, whose scope and scale is unprecedented in history,” it added. “Parliament obviously could not have contemplated a historically unprecedented situation of huge losses of revenue from the base—arising from an Act of God quite independently of GST implementation—affecting both Central and State revenues, direct and indirect.”