The amount to be borrowed will be passed on to the states as a back-to-back loan in lieu of GST compensation cess releases, the ministry said in an official statement.
The decision comes after the GST Council failed to reach a consensus on the Centre’s proposal of states borrowing against future GST collections to make up for the shortfall.
“Under the special window, the estimated shortfall of Rs 1.1 lakh crore (assuming all states join) will be borrowed by government of India in appropriate tranches,” the ministry said.
Under option-I states were to be provided a special window of borrowing of Rs 1.1 lakh crore, and over and above that, an authorisation for additional open market borrowings of 0.5 per cent of their GSDP (gross state domestic product).
In addition, states are also eligible to carry forward their unutilised borrowing space to the next financial year.
A slowdown in the economy since last fiscal has resulted in a drop in GST collections, upsetting the budgets of states which had given up their right to levy local taxes such as sales tax or VAT when GST was introduced in July 2017.
The Centre had in August given two options to the states — to borrow either Rs 97,000 crore from a special window facilitated by the Reserve Bank of India (RBI) or Rs 2.35 lakh crore from the market. It had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.
However, some opposition states were at loggerheads with the Centre over the compensation issue.
The ministry further noted that Centre’s borrowing will not have any impact on fiscal deficit. The amounts will be reflected as capital receipts of the state governments and as part of financing of its respective fiscal deficits. It will also avoid differential rates of interest that individual states may be charged for their respective SDLs, it said.
“The states that get the benefit from the special window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2 per cent of GSDP (from 3 per cent to 5 per cent) under the Aatmanirbhar Package,” the statement said.
After the GST meeting on Monday, finance minister Nirmala Sitharaman had said the Centre cannot borrow and pay states for the shortfall as it would lead to rise in bond yields, resulting in rise in borrowing costs for the government and the private sector.
“If there are states which want to borrow we will facilitate and I have also kept completely the option open for states to come and talk. If they have any questions, I ready to engage with them,” she had said.
Earlier this week, the finance ministry had stated that 21 states have accepted one of the two borrowing options suggested by the Centre.
(With agency inputs)