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Kerala may advance market borrowings to offset GST transition impact

Abhijit Lele/Mumbai 17 Jul 17 | 05:00 PM

Illustration: Binay Sinha

The Kerala government may advance market borrowing through state development loans (bonds) to offset any transitory impact on resources due to the goods and services tax (GST).

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According to the existing understanding with the central government, compensation will be given on a monthly basis.

Although the state has no issues with this arrangement, it will make raise the issue of front loading of loans (SDF) before the GST Council, Kerala State Finance Minister T T Thomas Isaac told Business Standard.

According to the indicative calendar of market borrowings maintained by the state governments, Kerala is slated to borrow Rs 6,000 crore between July and September in 2017. Out of this, the state has tentatively planned to raise Rs 5,000 crore in August itself. 

The market borrowing calendar is issued by the Reserve Bank of India (RBI).

Speaking about the problems facing the state under the new tax regime, Isaac said August would be a lean period as the state would get June’s revenue earnings in July. Consequently, there could be a significant impact on the state’s revenue collections in the following month, he said.

To ease the situation, the state suggests making adjustment through market bonds (borrowings). It is a simple means-to-an-end approach that could help the state brace itself in the wake of the GST rollout. 

Under the new regime, the Centre will compensate the states for loss of revenues for a period of five years.

The states are in a happy place as they have been guaranteed minimum 14 per cent rise following the implementation of GST, said Isaac, while adding that growth under the erstwhile Value Added Tax (VAT) system was much lower for most of the states last year.

“With three months having passed already in the current financial year, the central government may have to give away around Rs 1 lakh crore in compensation, thereby receiving a significant hit (in terms of financial burden)", he added.

State governments have been insured against it (GST effect). They are going to collect Rs 50,000 crore from the cess but they will have to spend much more.

Regular revenue in high-consuming states like Kerala will increase next year by 20 per cent. But by the third year, revenues of all states are going to be buoyant and the central government due to the expansion of tax base and the self-policing nature of GST.

It will take at least three years for the situation to normalise.  Even the rollout of the VAT charge took five years’ time to stabilise. There was chaos in the first year of implementation, while tax revenues came down sharply for the states in the initial stages. However, eventually, the states picked up and the situation normalised.

Speaking on the issue of the abolition of inter-state trade tax- an issue that has created a furore in Maharashtra- Isaac said the state that had a huge consumer base to bank upon has nothing to worry about.

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