GST Council and Compensation cess

  • August 27, 2020
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Subject: Economy

Context:

The Goods and Services Tax (GST) Council met to discuss on compensating states for revenue shortfall.

Concept:

GST Council

  • Goods & Services Tax Council is a constitutional body for making recommendations to the Union and State Government on issues related to Goods and Service Tax.
  • As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A.
  • As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members: –
    • the Union Finance Minister………………………………………………………. Chairperson;
    • the Union Minister of State in charge of Revenue or Finance…………….. Member;
    • the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government……………………………….. Members.
  • As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws, principles that govern Place of Supply, threshold limits, GST rates including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc.

Compensation Cess

  • 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.
economy GST Council and Compensation cess