'Act of God' in form of Covid pandemic may lead to Economic contraction: Finance Minister
A big statement was made today by Finance Minister Nirmala Sitharaman after 41st GST Council meeting of 27th August when she said that‘Act of God’ being faced by the economy in form of Covid Pandemic may result in economic contraction. This statement was made during one of the questions asked to her by a journalist during the virtual press brief after the meeting.
41st GST Council meeting was held today through video conferencing with a single agenda of discussing compensation pay for revenue shortfall to states. There has been immense pressure from states seeking payment of revenue shortfall which was promised to be compensated by Centre for initial five years of GST regime that too with annual 14% increment. Todays meeting was a marathon one and took place for more than five hours.
As per the calculations presented by Centre, estimated compensation requirement of states could be around Rs 3 lakh crore for current financial year. While 65,000 crores are expected to be met through the cess collection. Cess was specifically levied for paying the compensation to the states. This leaves with a shortfall of around Rs. 2.35 lakh crore.
Revenue secretary, Ajay Bhushan Pandey, during the virtual media briefing, explained that this gap of Rs. 2.35 lakh crore is not entirely due to GST but also due to the Covid pandemic impact on the economy. Government worked out that Rs. 97,000 crores are due to the implementation of GST while the balance is due to the Covid pandemic effect. Two options have been placed before the states to deal with the shortfall.
These two options given by Centre to state are
- First option is that states can borrow the shortfall amount of Rs. 97,000 crores which is due to GST implementation at a reasonable interest rate worked out after consultation with RBI. The borrowed amount is to be repaid after ending of Five years (i.e. after June 2022) utilizing the Cess collection after that period.
- Second option put forth by Centre is that state can borrow the entire amount of Rs. 2.35 lakh crore shortfall under the provided special window.
States have been provided seven days to think and chose the option.
The government clarified that these options or the arrangement would be available only for the current fiscal year. For the next year a review would be done at the start of the financial year through a Council meet in April 2021 and decision would be taken on the basis of the prevalent economic situation during that time about which government was hopeful might improve from the current scenario.
States are going to borrow the amount while Central said that they are going to facilitate the borrowing process through RBI. Before the GST Council meet, expert also suggested that Centre could borrow the fund for shortfall instead of states borrowing individually.
Government also clarified that revenue shortfall of states is anyway protected and would be paid to states after the end of five years not depending on the amount states decide to borrow. The option has been left to the states to decide the borrowing amount on the basis of their requirements as the borrowed amount has to be repaid after all.
CA Kalpak Kaplash
