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Informist, Saturday, Feb. 1, 2025

NEW DELHI – The government is slated to clear the entire goods and services tax loans of states, provided in 2020-21 (Apr-Mar) and FY22 to compensate them for the shortfall in goods and services tax collections during the COVID-19 pandemic, by next year, Budget documents for FY26 showed. Some of the government bonds against which these loans had been extended are scheduled to mature only in FY27.

The government had borrowed INR 2.69 trillion in FY21 and FY22 and provided back-to-back loans to states. Out of this, INR 781 billion was repaid in FY24 using GST compensation fund. The government cleared another INR 1.24 trillion of the loans in FY25 and used the proceeds to reduce the Centre's gilt redemptions.
 

The Budget for FY26, presented by Finance Minister Nirmala Sitharaman in the Lok Sabha on Saturday, showed the government would use INR 675 billion from the GST compensation fund in FY26 to clear the outstanding dues and reduce the government's redemptions for the year.

The government had raised INR 1.10 trillion in FY21, split equally between three- and five-year bonds, and INR 1.59 trillion in FY22 through two- and five-year bonds. When the GST regime was introduced in 2017, the Centre had promised to protect 14% revenue growth for states for the first five years by levying a cess on some luxury items. The government used the back-to-back loans to compensate the states during the years of the COVID pandemic. The five-year period ended in June 2022.

The government was hopeful of repaying these loans ahead of schedule, Sitharaman said in the Lok Sabha in February last year. The government aims to collect INR 1.53 trillion as GST compensation cess in the current fiscal and INR 1.67 trillion in FY26. A back-of-the-envelope calculation shows that the government will have excess funds under this head if the current rate of cess collections continues.  End

Reported by Aaryan Khanna

Edited by Saji George Titus

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