The Centre will borrow the goods and services tax (GST) compensation shortfall of Rs 1.1 lakh crore, if all states choose option 1, and loan the amount to the states, the finance ministry said in a statement on Thursday.

“Under the Special Window, the estimated shortfall of Rs 1.1 lakh cr (assuming all States join) will be borrowed by Government of India in appropriate tranches,” it said.

The move will not have any impact on the government’s fiscal deficit and the amount will be reflected as capital receipts for the states as part of financing their deficits, the statement said.

The borrowing will be passed on to the states “as a back-to-back loan in lieu of GST Compensation Cess releases”, it said.

“This will avoid differential rates of interest that individual States may be charged for their respective SDLs (state development loans) and will be an administratively easier arrangement,” the ministry said.

The move will also not push up the combined government borrowing, it said, adding that states that choose option 1 are expected to borrow a considerably lesser amount under the additional borrowing limit permitted to them.

Under option 1, the states were to be provided with a special window for borrowing the shortfall amount over and above the additional borrowing limit of 0.5% of gross state domestic product made unconditional for them.

During the GST Council meeting on Monday, opposing states pushed for a group of ministers to resolve the deadlock since there was no consensus.

Kerala finance minister, Thomas Isaac, said, “Some of the States are likely to approach SC (Supreme Court) against discriminatory and illegal action of Centre regarding GST Compensation,” in a tweet on Thursday.

Tamil Nadu became the 21st state to choose option 1 that the Centre provided to the states in place of direct transfer of GST compensation funds as the compensation cess collection is expected to fall short this fiscal on account of the pandemic.

As of Wednesday, 21 states and two union territories selected option 1, taking the total amount that states can mobilise under the special window to Rs 78,452 crore.

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