Corona may lead to economic contraction: Nirmala Sitharaman

New Delhi: The Centre on Thursday placed before the GST Council two options for borrowing by states to meet the shortfall in GST revenues, pegged at Rs 2.35 lakh crore in the current fiscal.

Briefing reporters after the 41st meeting of the GST Council, Union Finance Minister Nirmala Sitharaman said the economy is facing an extraordinary 'Act of God' situation that may result in an economic contraction.

As per the Centre's calculation, the compensation requirement by the states in the current fiscal would be Rs 3 lakh crore, of which Rs 65,000 crore is expected to be met from the cess levied in the GST regime. Hence, the total shortfall is estimated at Rs 2.35 lakh crore.

Revenue Secretary Ajay Bhushan Pandey said that of this estimate, Rs 97,000 crore is on account of GST shortfall, while the rest is due to the impact of coronavirus. "The compensation gap which has arisen this year (expected to be Rs 2.35 lakh crore), is due to coronavirus as well. The shortfall in compensation due to the implementation of GST has been estimated to be Rs 97,000 crore," he said.

Pandey said a special window can be provided to the states, in consultation with the RBI, at a reasonable interest rate for borrowing of Rs 97,000 crore. The amount can be repaid after five years (of GST implementation) ending 2022 from cess collection.

The second option before the states is to borrow the entire Rs 2.35 lakh crore shortfall under the special window. "States have been given seven days' time to think over the proposal," Pandey said.

"During April-July 2020, the total GST compensation to be paid to states is Rs 1.5 lakh crore, this is so because there was hardly any GST Collection in April and May," said Pandey.

The 41st meeting of the GST Council, headed by Union Finance Minister and comprising representatives of all states, held deliberations via video conferencing on ways to make up for the shortfall in states' revenues.

While the Congress and the states ruled by non-NDA parties pushed for the Centre meeting its statutory obligation of covering the deficit, the Union government cited a legal opinion to say it had no such obligation if there was a shortfall in tax collections. The Centre as well as BJP-JD(U)-ruled Bihar were of the opinion that the states should borrow to make up for the shortfall in the tax revenues that have been compounded by the COVID-19 crisis.