India to borrow $22b more this FY to compensate states for tax shortfall

India's federal government will borrow $22 billion from the market to compensate the country's states for a shortfall in tax receipts this fiscal year, but it deferred cutting taxes on medicines and medical equipments used to treat coronavirus patients.

This borrowing would be additional to the 12 trillion rupees ($166 billion) it already plans to raise in the fiscal year that started on April 1.

India's deadly second wave of coronavirus that killed thousands of people in the last two months is now threatening an economic revival that had begun to take hold since the beginning of the year.

The economy is showing signs of distress, such as falling tax collections and slump in sales of a variety of goods including automobiles.

The Goods and Services Tax (GST), India's biggest tax reform, was introduced in 2017 to replace an array of federal and state duties. State governments were promised compensation through a surcharge on taxes on luxury goods for five years to ensure 14 per cent annual growth in GST revenue.

Federal Finance Minister Nirmala Sitharaman was speaking to reporters after the meeting with the Goods and Services Tax Council, which she chairs and includes all state finance ministers of the country.

The outcome of the meeting, which the council's first for eight months, disappointed some of its members and experts, after it deferred reducing taxes on Covid-19 related medical equipments and medicines.

"The council has failed to address major pain points of the industry and the common man resulting from the pandemic," said Rajat Bose, partner at Shardul Amarchand Mangaldas & Co, a law firm.

Sitharaman said that a committee would be set up to look into reducing rates of various medical equipments and medicines. The committee would submit its report in the coming 10 days, she added.

"GST #Covid19 relief put on hold for lack of compassion by the Union Government," Manpreet Singh Badal, finance minister of Punjab tweeted after the meeting. Badal is also the member of the GST council.