Centre may prepay market loans taken to compensate states for GST revenue loss during Covid years

The central government may be able to repay Rs 2.69 lakh crore loans it had taken to compensate states for GST revenue loss in FY21 and FY22 by November 2025, four months ahead of its scheduled repayment, an official has said.

The full repayment of the market borrowings is expected earlier than the previously calculated timeline of March 2026. 

The issue is expected to be taken up for discussion in the next meeting of the GST Council in August, the official added.

The compensation cess was initially brought in for five years to make up the revenue shortfall of states, following the implementation of the Goods and Services Tax (GST). 

The compensation cess expired in June 2022, but the amount collected through the levy is being used to repay the interest and principal of the Rs 2.69 lakh crore that the Centre had borrowed during COVID-19.

At the 53rd GST Council meeting on Saturday, it was learnt that Karnataka had raised the issue of continuation of compensation cess levy, repayment of the loan amount and its way forward.

"It was clarified to the states that the loan amount may be repaid early. Maybe, by November 2025 instead of March 2026. So, how the cess amount would be apportioned beyond November 2025, all this would be discussed in the next Council meeting," the official said.

The GST Council will now have to take a call on the future of the current GST compensation cess with regard to its name and the modalities for its distribution among the states once the loans are repaid.

To meet the resource gap of the states due to the short release of compensation, the Centre borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans to meet a part of the shortfall in cess collection.

In June 2022, the Centre extended the levy of compensation cess, which is imposed on luxury, sin and demerit goods, till March 2026 to repay borrowings taken in FY21 and FY22 to compensate states for revenue loss.

GST was introduced on July 1, 2017, and states were assured of compensation for the revenue loss till June 2022, arising on account of the GST rollout.

Though states' protected revenues were growing at 14 per cent compounded growth post-GST, the cess collection did not increase in the same proportion. 

COVID-19 further increased the gap between the protected revenue and the actual revenue receipt, including a reduction in cess collection.

To meet the resource gap of the states due to the short release of compensation, the Centre borrowed and released Rs 2.69 lakh crore in 2020-21 and 2021-22 as back-to-back loans to meet a part of the shortfall in cess collection. 

This loan was to be repaid by March 2026.