GST Compensation
- March 16, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
GST Compensation
Subject: Economy
Section: Fiscal policy
The introduction of the Goods & Services Tax (GST) required States and Union Territories (with Legislature) to subsume their sovereignty in a GST Council, raising the issue of loss on account of migration from Value Added Tax/Sales Tax to GST.
The GST Compensation Act, 2017 guaranteed states that they would be compensated for any revenue shortfall below 14% growth (base year 2015-16) for the first five years ending 2022.
A GST compensation fund is created from which the state would be paid the shortfall every two months by the Centre.
This corpus is funded through a compensation cess that is levied on so-called ‘demerit’ goods.
The items are pan masala, cigarettes and tobacco products, aerated water, caffeinated beverages, coal and certain passenger motor vehicles.
Issue:
- The economic slowdown had reduced both GST and cess collections in FY 2019-20, resulting in a 40% gap (shortfall) between the compensation paid and cess collected.
- The pandemic worsened the GST compensation gap due to increased fiscal spending of both centre and states
- The provision for GST compensation is going to end in June 2022.
- Decreasing Centre Devolution-Most states are of the view that the Centre’s share in centrally-sponsored schemes has gradually reduced and states’ share has increased
Steps taken:
Centre had borrowed from the market under a special window and passed it onto the States as back-to-back loans. This was meant to help States meet the resource gap due to short-release of compensation on account of inadequate balance in the compensation fund.
Way forward:
- Extending the GST compensation system beyond the current deadline.
- Inclusion of excluded items- land, electricity and petroleum products such as petrol, diesel and aviation turbine fuel etc in the GST regime to increase revenue of the states.