GST COMPENSATION

Subject: Economy

Context: Opposition leader of Tamilnadu has written to Chief Minister urging him to hold the Centre accountable for the non-payment of GST compensation to the States.

Concept:

Three years after the introduction of India’s new indirect tax regime, GST, it has started to face an existential crisis. The gains of GST have started to quickly erode as the slowdown in the economy, exacerbated by the Covid-19 lockdowns, has thrown all revenue calculations to the wind.

Due to huge shortfalls in the tax collection under GST the Central government and State Government has come at loggerheads as Centre has shown its incapability to compensate the States as promised under the GST Act 2017.

GST Compensation

After the introduction of GST States have very limited taxation rights as most of the taxes, barring those on petroleum, alcohol, and stamp duty, were subsumed under GST.

GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.

Under the GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years between 2017 and 22.

The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.

Logic Behind GST Compensation

In theory the GST should generate as much revenue as the previous tax regime.

However, the new tax regime is taxed on consumption and not manufacturing.

This means that tax won’t be levied at the place of production which also means manufacturing states would lose out and hence several states strongly opposed the idea of GST.

It was to assuage these states that the idea of compensation was mooted.

To make this promise watertight, the idea of compensation was both written into the Constitution and its finer details passed by way of central legislation.