GST compensation: Karnataka indicates preference for Option 1

Bengaluru: Out of the two borrowing options offered by the Centre to states to make up for the GST revenue loss, Karnataka government on Wednesday indicated it preference for Option 1.

The decision was taken at a meeting presided by Chief Minister BS Yediyurappa with senior finance department officials.

Under Option 1, Karnataka will be eligible for a compensation of Rs 18,289 crore, whereas, under Option 2, the state was eligible for Rs 25,508 crore.

A statement from the Chief Minister’s Office (CMO) said, “After the evaluation of both these options, it is felt that Option 1 would be more beneficial to the state’s finances. Hence, the Government of Karnataka has decided to convey to the Government of India its preference for Option 1.”

According to the CMO, under Option 1, Rs 6,965 crore out of Rs 18,289 crore will come from the cess collected. “For the remaining amount of Rs 11,324 crore, Karnataka would be able to borrow through a special window with the entire burden of principal and interest repayment being met out of compensation cess fund in the future,” the CMO said.

The Centre offered states two options to plug a shortfall in their revenue, estimated at Rs 2.35 lakh crore in the financial year that ends in March 2021, at the 41st meeting of the GST Council held last week.

First, states can borrow Rs 97,000 crore at reasonable interest rates from a special window that will be opened in consultation with the Reserve Bank of India. Both the principal and the interest payments will come from cess collections. In the second option, the states can borrow the entire Rs 2.35 lakh crore, but will have to bear the interest cost. The Centre has defined losses arising from implementation of GST at Rs 97,000 crore and the balance as losses arising from an Act of God (Covid-19).

Several states have rejected both the options offered to them, and asked the Centre to borrow to make good its commitment to the states.

Meanwhile, the Opposition Congress in Karnataka too had asked the BJP government not to accept the proposal to borrow.