GST compensation row: Karnataka decides to prefer Option 1 to meet revenue losses for this fiscal

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Karnataka finds that the first option is beneficial for it as it is eligible for Rs 18,289 crore under this option

Even as a few non-BJP ruled states on Monday decided to take up the GST compensation issue with the Prime Minister, the Karnataka government will inform the Centre that it will pick the first option given by the GST Council to meet its compensation losses for this financial year.

Accordingly, Karnataka will prefer Option 1, which involves borrowing through a special window facilitated by the Goods and Services Tax (GST) Council through the Reserve Bank of India (RBI) at an affordable interest rate, and it was decided at meeting held at Chief Minister BS Yediyurappa's official residence on Wednesday.

Karnataka finds that the first option is beneficial for it as it is eligible for Rs 18,289 crore under this option. Of the 18,289 crore, the cess part forms Rs 6,965 crore and the state will be permitted to borrow rest of the amount -- Rs 11,324 crore -- through the special window.

Though Karnataka said that it is eligible for Rs 25,508 crore under Option 2, which is borrowing from the market, the state ruled out the option saying that it would not have access to unconditional borrowing of 1 percent of GSDP, which is about Rs 18,036 crore, said a report in CNBC TV18.

“After the evaluation of both the options, it is felt that Option 1 would be more beneficial to the state’s finances. Hence, the government of Karnataka has decided to convey to the Government of India its preference for Option 1,” it said quoting a press note issued by the state government.

The burden of interest payment on borrowing under Option 2 is on the state government.  

It may be noted that non-BJP states rejected both borrowing options suggested by the GST Council at its 41st meeting last week and argued that the GST regime mandates payment of compensation to states by the Council.

After the GST Council meeting, Revenue Secretary Ajay Bhushan Pandey said that out of the total shortfall of Rs 2.35 lakh crore, Rs 97,000 is on account of GST and the remaining is due to outbreak of the COVID-19 pandemic.

Based on this, the Centre gave two options to the states.

1) To borrow up to Rs 97,000 crore, which is the shortfall in the GST revenue compensation.

2) To borrow the entire Rs 2.35 lakh crore, which is the total shortfall, including the impact of COVID-19.

Allaying the concerns of the states, the Centre made it clear that the burden of the borrowing would not fall upon the states as it would be borne by extension of the cess imposed on sin and luxury goods.

Image credit: File photo

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