Government asks states to borrow $32 billion to meet tax shortfall

NEW DELHI (Reuters) - The government on Thursday asked state administrations to raise $32 billion in loans, as part of a proposal to cover a shortfall in fiscal receipts that could see a surcharge on the country’s luxury goods tax extended beyond 2022.

India's Finance Minister Nirmala Sitharaman attends a joint news conference with U.S. Treasury Secretary Steven Mnuchin in New Delhi, India, November 1, 2019. REUTERS/Adnan Abidi/File Photo

The surcharge on luxury goods such as cars and tobacco products is part of the national goods and services tax (GST), introduced in 2017 to incorporate state-level taxes and whose receipts fell more than 40% year-on-year in the three months to June due to economic fallout from a coronavirus lockdown.

Under that 2017 agreement, the states were mandated to increase their share of fiscal receipts by 14% per year, while Prime Minister Narendra Modi promised to compensate states for five years if they failed to achieve that target.

The target has been missed, but receipts from the luxury tax surcharge that the government has used to compensate the states are also down, having dropped nearly 42% to 132.7 billion rupees in the June quarter.

Finance Minister Nirmala Sitharaman said she had asked her counterparts at state level during an online meeting to borrow up to 2.35 trillion rupees ($31.8 billion) from the market to help close the fiscal gap.

The states had asked for a week to consider the proposal, she told reporters.

Opposition-governed states said central government should do the borrowing.

Ajay Bhushan Pandey, revenue secretary at the finance ministry, said the states’ tax shortfall in the fiscal year that began in April was estimated at 3 trillion rupees.

He said the proposed loans could be repaid by extending the luxury tax surcharge beyond its planned expiry date of 2022.

Pandey also said the federal government could support the states to raise up to 970 billion rupees in loans from the central bank at a preferential rate.

Opposing Sitharaman’s plan, the finance minister of opposition-controlled Punjab, Manpreet Badal, said it would hit the state’s receipts after 2022 as it would have to repay the loans from future tax collections.

Reporting by Manoj Kumar and Aftab Ahmed; Editing by Toby Chopra and John Stonestreet