GST Compensation

GST Compensation

Subject: Economy

Section: External Sector 

Context:

GST compensation dues to States for 2021-22 stood at ₹78,704 crore, due to inadequate balance in the Compensation Fund

Details:

The levy of the compensation cess, which was to cease on June 30 this year, has been extended till March 2025-26 with a view to use the receipts to repay the principal and interest on these special loans.

Concept:

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.

The compensation was to be calculated by assuming a 14% year-on-year growth over revenues in 2015-16 from the State taxes subsumed in GST, and remitted from a compensation cess fund.

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.

Normally, compensation for 10 months from April-January of any financial year is released during that year and the compensation for February-March is released only in the next financial year. The GST Compensation regime ends in June 2022

Issue:

• Decline in Compensation cess
• Structure of GST- even though state GST collections have improved and is even greater than Centre’s share in the last few months, that is not enough for some of the producer states as GST is primarily a destination-based tax. Producer states may face more fiscal stress as consumption happens outside state lines.

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.