Will pay GST arrears despite losses due to 'act of God': Centre tells states

New Delhi: The Centre in a letter to the states has promised to clear their Goods and Services Tax (GST) dues despite the massive shortfall in GST cess collection amid the pandemic, a situation that has been described as "an act of God" by Union Finance minister Nirmala Sitharaman.

In a letter to finance secretaries of all states and Union Territories, Union Finance Secretary Ajay Bhushan Pandey said while additional borrowing by the Centre influences the yields on central government securities (G-secs) and has other macro-economic repercussions, the yields on state securities do not directly influence other yields and do not have the same repercussions.

"Hence, it is in the collective interest of Centre and states and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the central level when it could be done at the state level," Pandey wrote in the letter.

The Union Finance Secretary and the Expenditure Secretary will hold an online meeting on September 1 to answer queries of the states on two options that the Centre has proposed — the first being states won't have to service debt or repay it from other sources, and the second being states won't have to repay the principal amount from any other sources.

"The Government of India stands by the statement of (former Finance Minister) Shri (Arun) Jaitley and is actively working with the states to work out such an arrangement. The Government of India will support the extension of the compensation cess for such period as may be necessary to completely discharge any arrears of compensation," the Centre said in the letter.

Compensation payment has been an issue since August 2019 with GST collections faltering. In the current fiscal, the compensation requirement of states has been estimated at Rs 3 lakh crore, of which Rs 65,000 crore would be funded from the revenues garnered by levy of cess. This leaves a shortfall of Rs 2.35 lakh crore.

The Centre has estimated that of this Rs 2.35 lakh crore, Rs 97,000 crore compensation requirement is due to GST rollout and the remaining is on account of the impact of COVID-19 on the economy.