BENGALURU: After much deliberation, the Karnataka government on Wednesday decided to take up one of the GST Council's options to facilitate borrowings to make up for GST compensation losses. In a meeting held at Chief Minister BS Yediyurappa's official residence, it was decided that Option 1 - borrowing the shortfall arising out of implementation of the GST regime - would be financially beneficial for the state.
Under this option, Karnataka would be eligible for total compensation of Rs 18,289 crores, of which Rs 6,965 crores would come from cess collected. For the rest of the Rs 11,324 crores, the state will be allowed to borrow through a special window facilitated by the GST Council through the Reserve Bank of India at a reasonable rate of interest (interest rates are yet to be fixed). Under this option, the principal and interest repayment will come out of the compensation cess fund after 2022 when the first five years of the GST regime ends.
"We are happy to note that the rights of the states with respect to their entitlement of entire compensation due under GST has been recognised and accepted by the central government. The arrears of compensation during the transition period would be met by the extension of cess beyond 2022, if so decided by the Council," said a statement issued by the Chief Minister's office.
Under Option 2, Karnataka would be eligible for a total compensation of Rs 25,508 crores, of which Rs 6,965 crores would come from cess collected. The remaining amount of Rs 18,453 would come from borrowings via open market debt. The interest on the borrowings under this option will have to be paid by the state. Non-BJP states have rejected both borrowing options suggested by the GST Council, insisting that the GST law mandates payment of compensation to states by the Council.
Insisting that it cannot pay compensation to states due to losses in revenue collection estimated at Rs 2.35 lakh crores for the fiscal year 2020-2021, the GST Council has asked states to borrow to make good the losses.
States can choose to borrow Rs 97,000 crore - the losses estimated to be arising from the implementation of GST regime - at reasonable interest rates where the principal and interest payments can be paid from cess collection post 2022.
The second option for states is to borrow the entire sum of estimated shortfall of Rs 2.35 lakh crore - arising out of an "Act of God" - as defined by Finance Minister Nirmala Sitharaman, with a catch that the states will have to bear the interest costs.