GST compensation fund

Subject: Economy

Context:

States have raised concerns about the delayed compensation payments under the Goods and Services Tax (GST) regime by the Centre for this fiscal, citing the need for expenditure in their respective states.

Concept:

• Compensation cess was introduced as relief for States for the loss of revenues arising from the implementation of GST.
• States, in lieu of giving up their powers to collect taxes on goods and services after local levies were subsumed under the GST, were guaranteed a 14 per cent tax revenue growth in the first five years after GST implementation by the Central government.
• States’ tax revenue as of FY16 is considered as the base year for the calculation of this 14 per cent growth.
• Any shortfall against it is supposed to be compensated by the Centre using the funds specifically collected as compensation cess.
• Compensation cess is levied on five products considered to be ‘sin’ or luxury goods like SUV, pan masala, cigrattes.
• The collected compensation cess flows into the Consolidated Fund of India, and then transferred to the Public Account of India, where a GST compensation cess account has been created.
• States are compensated bi-monthly from the accumulated funds in this account.