GST Compensation Mechanism

GST Compensation Mechanism

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.

As per Section 18 of the Constitution (101st) Act, 2016, Parliament “shall, by law, on the recommendation of the GST Council, provide compensation to States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period of five years from the date of its implementation.

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.

For more refer MAY DPN Compilation