Be e At the outset, let me thank you for the highly constructive co-operation your Government has given in finding a solution to the issue of GST compensation to States. The current financial year is truly unprecedented in terms of the severe impact on revenues of the Covid pandemic. | am well aware of the financial difficulties that the States are facing. | wish to compliment the State Governments for the active role they have played in fighting the pandemic. The Union Government has also been badly affected by the fall in revenue and the enhanced level of expenditure required to meet the essential needs of relief and recovery and of State Governments. It is against this background that the GST compensation issue is being resolved. 2. In order to understand the correct legal position, the Government of India sought the opinion of the Attorney General of India, after discussing the matter in the Council. The key relevant elements of his opinion are as follows:- (i) There is an obligation to pay compensation to the States for the entire shortfall as calculated under Section 7 of the Act, regardless of whether such shortfall is attributable to GST implementation or not; (i) However, the compensation is to be paid from proceeds of the GST Compensation Cess and it is not an obligation of the Central Government to pay it from the Consolidated Fund of India. 3. Thus, the legal position, accepted by the Government of India, is that the entire amount (whether due to GST implementation or not) is payable, but through proceeds of the Cess. The Government of India is fully committed to discharge the legal obligations in full. Accordingly, with the support of Government of India, the GST Council has resolved to extend the period of levy of Compensation Cess beyond July, 2020 in order to provide funds for payment of arrears of total compensation due as per Section 7. Contd...P/2 Office : 134, North Block, New Delhi-110001 Tel. : 23092610, 23092510 Fax : 23092828 Residence : 15, Safdarjung Road, New Delhi - 110011, Tel, : 23793791 Fax : 23793792B e 4. Nevertheless, and notwithstanding the legal position above, the Government of India, in keeping with the spirit of the statement of the first Chairperson of the GST Council, Shri Arun Jaitley, is working with the State Governments to arrive at a solution whereby substantial resources are made available to the States this year itself. Two options were proposed of which Option-I has been accepted by 21 States and 2 Union Territories, including your Government. Under this scheme, State Governments get funds from two sources. Firstly, they will get loans through a special window arranged by the Government of India. The special window covers the shortfall arising from implementation of the GST (calculated at Rs.1,10,208 lakh crores). The second source is through additional unconditional market borrowing. The condition attached to the final portion of borrowing package issued on 17" May, 2020 will be relaxed. Thus States will be able to borrow an amount equivalent to 0.5% of GSDP without meeting any reform conditions. The amount of funds available to States collectively under Option-I works out to Rs.1,10,208 crores (special window) plus Rs.1,06,830 crores (0.5% of GSDP without condition). Hence, a total of over Rs.2,16,000 crores of resources is unconditionally available under Option-I. This more than covers the funds which would have been received during the current financial year, if total compensation were paid in full. (I am informed that out of an estimated shortfall of Rs.2.35 lakh crores accruing in the current financial year, Rs.1.83 lakh crores would have been payable this year and the rest next year.) In other words, under Option-I, the State will not face any cash shortfall relative to the hypothetical position if they had got the total compensation under the Act. 5. | am also sensitive to the fact that States need to be protected from the adverse consequences of higher borrowing in the form of interest liability and addition to debt. Under Option-| the Union Government will arrange the borrowing in such a manner that the cost will be at, or close to, the interest rate of the Union Government. As regards the additional debt, it has been made clear that the debt through the special window will not be accounted for as State’s debt for the purpose of Finance Commission and other such norms. Contd..P/3a@Pa CONTINUATION SHEET 6. Moreover, it has been made clear that the entire interest liability and principal for the borrowing under this window will be met from proceeds of Cess As such the principal and interest need not be paid from the regular budgetary resources of the State. B | wish to bring to your attention that the Central Government faces very serious budgetary constraints and the Central fiscal deficit this year will be far in excess of what was budgeted. We have attempted to structure the special window in the optimum manner to protect the long term economic interests of the nation, including public and private sector. Long term macro-economic stability is the responsibility of the Centre; but it is also in the interest of the States who are partners in our system of cooperative federalism. The bona fide opinion of the Central Government on this macro-economic issue is that borrowing on the books of Centre will not be optimal in the national interest. 8. We have now worked out some key asy 's of the special window. Based on suggestions of many States, it has now been decided that the Central government will initially receive the amount, and then pass it on back-to-back to the States as loan. This will enable ease of coordination and simplicity in borrowing, apart from ensuring a favourable interest rate. 9. Hence, it may be seen that:- @ The quantum of resources available to the State is adequate to meet the entire amount of compensation which would have been payable this year, (i) The interest rate will be very reasonable; (iii) The interest and principal will be met from the future proceeds of the Cess; (iv) It is the accepted position of the Government of India that the entire arrears of compensation will eventually be paid to the States (subject to deduction of amounts needed for servicing the borrowing) (v) The borrowing will be directly arranged by the Central Government and passed on back-to-back to the States. Contd...P/4Mt CONTINUATION SHEET 10. In conclusion, | wish to place on record my appreciation for the collaborative approach your Government has taken, which has resulted in a constructive and practical solution to this matter, in the best interests of the nation. The additional unconditional borrowing has already been authorised to your State. We are moving ahead with the Special Window, and it will be made operational at the earliest. | look forward to your continued co-operation in taking our great nation forward, With regards, Yours sincerely (Nirmala Sitharaman)