The central government is poised to expedite the repayment of ₹2.69 lakh crore in market loans, originally secured to compensate states for GST revenue shortfalls during FY21 and FY22. According to an authoritative source, the repayment could be completed by November 2025, surpassing the earlier target of March 2026 by four months. This critical financial update is slated for deliberation at the forthcoming GST Council meeting in August.
Initially, the compensation cess was implemented to address the revenue deficit faced by states post-GST implementation, set to last for five years. Despite its expiration in June 2022, the collected cess continues to fund the repayment of the substantial ₹2.69 lakh crore borrowed amidst the COVID-19 pandemic.
At the recent 53rd GST Council meeting, Karnataka spotlighted the continuation of the compensation cess levy and the strategies for the loan’s early repayment. An official elucidated that states were informed of the potential for an accelerated repayment by November 2025, prompting discussions on the allocation of cess funds post-repayment at the next Council assembly.
The GST Council must now deliberate on the future framework of the GST compensation cess, specifically its designation and the mechanisms for equitable distribution among states after the loan is settled. To bridge the fiscal gap due to under-realized compensation, the Centre had previously borrowed ₹1.1 lakh crore in 2020-21 and ₹1.59 lakh crore in 2021-22, facilitating back-to-back loans to mitigate cess collection deficits.
In light of the revenue assurance extended to states until June 2022 post-GST introduction in July 2017, the Centre prolonged the compensation cess on luxury and demerit goods until March 2026. This extension aimed to reimburse the borrowings undertaken during FY21 and FY22 to offset the revenue discrepancies exacerbated by the pandemic.
Despite states’ protected revenues growing at a compounded annual rate of 14% following the GST rollout, cess collections did not parallel this increase, a disparity further widened by the economic impact of COVID-19. Consequently, the Centre’s strategic borrowing of ₹2.69 lakh crore during 2020-21 and 2021-22 addressed the resource gap, with a repayment trajectory now potentially concluding ahead of schedule.
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