GST compensation: Karnataka goes with option 1

BJP-ruled Karnataka on Wednesday announced that it would pick the first of the two options provided by the Centre to compensate the state for the GST revenue loss.

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.

The decision to go with the first option was taken after Chief Minister BS Yediyurappa, the finance minister, held a meeting with senior finance department officials.

"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. This would help the state in augmenting its revenue in the present financial year," the Chief Minister’s Office (CMO) said in a statement.

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.

“Further, an additional borrowing up to 1 per cent of the GSDP (Rs 18,036 crore) will be available unconditionally and another 1 per cent borrowing can be done linked to certain reforms as earlier suggested by the Government of India...These additional borrowings may also be carried forward to the next financial year, if necessary,” the CMO said.

The second option was sidelined as it would burden the state. Out of Rs 25,508 crore, the state would get Rs 6,965 crore from the cess collected. “And the remaining amount of Rs 18,543 crore would be allowed to borrow through an issue of market debt. However, in this option, unconditional borrowing of 1 per cent of GSDP will not be separately available to the state,” the CMO explained. “As a result, the net borrowing of the state will reduce substantially by an amount of Rs 10,817 crore. Further, under Option 2, the interest on the above borrowing through issue of market debt shall be paid by the state from its own resources.”

Following the GST Council meet held last week, two options were proposed for states to address GST compensation shortfall.

Several state governments have rejected both the options, stating that the Centre was bound by law to compensate states. Under Option 1, states will have to cumulatively borrow Rs 97,000 crore to cover shortfall in compensation caused only due to the implementation of GST, while Option 2 allowed states to borrow the entire GST compensation shortfall of Rs 2.35 lakh crore.

The Opposition Congress had asked the BJP government not to accept the proposal to borrow.