After a departure from its stance that state governments should undertake market borrowings to make up for the loss of revenue on account of the Goods and Services Tax implementation, Finance Minister Nirmala Sitharaman on Friday wrote a letter explaining the contours of the scheme, CNBC-TV18 reported.

The finance ministry on Thursday resolved the impasse between the Centre and states by agreeing to borrow Rs 1.1 lakh crore under a special window to meet the GST compensation shortfall this year.

In her letter, Sitharaman thanked the states for their “highly constructive cooperation” to resolve the problem. The finance minister said the Centre will now undertake the required borrowings in tranches and pass it on to states as a “back-to-back loan” that will reflect on their own books. “This will enable ease of coordination and simplicity in borrowing, apart from ensuring a favourable interest rate,” she wrote. “The current financial year is truly unprecedented in terms of the severe impact on revenues of the Covid pandemic.”

Sitharaman added that the quantum of resources available to states was adequate to meet the entire amount of compensation which would have been payable this year. “The interest rate will be very reasonable,” the letter said. “The interest and principal will be met from the future proceeds of the cess.”

The total shortfall in collection of GST is estimated at Rs 2.35 lakh crore. As per the Centre’s estimates, the states’ GST revenue gap in 2020-’21 will amount to about Rs 3 lakh crore, while cess collections are only projected to reach Rs 65,000 crore, leaving a shortfall of Rs 2.35 lakh crore.

Sitharaman assured state governments that the entire arrear of compensation would eventually be paid to them. “I am also sensitive to the fact that states need to be protected from the adverse consequences of higher borrowing in the form of interest liability and addition to debt,” she said, adding that the borrowing would be at, or close to, the interest rate of the central government.

“As regards the additional debt, it has been made clear that the debt through special window will not be accounted for as states’ debt for the purpose of the Finance Commission and other such norms,” the letter read.

GST compensation

On August 27, Finance Minister Nirmala Sitharaman at the GST Council meeting had said that the crisis facing the states is an unforeseen “act of God”, referring to the coronavirus pandemic. The Centre offered two options for borrowing by states to meet the shortfall. The first option was to provide a special borrowing window to states, in consultation with the Reserve Bank of India, to provide Rs 97,000 crore at a reasonable interest rate. The other option was to meet the entire GST compensation gap of Rs 2.35 lakh crore this year itself after consulting the central bank.

Only 21 of the 36 states and Union Territories had agreed to borrow. Opposition-ruled states had said that the Centre must borrow instead of its push for the states to do so.

A GST Council meeting with finance ministers of states was held on October 12. It was the second one in a week and the third overall to resolve the standoff between Opposition-ruled states and the government. However, the GST Council meeting failed to reach an agreement with states and Union Territories on the borrowing options made available. Sitharaman had then said that the Centre cannot afford to borrow at present.