Section 18 of 101st CAA and GST Compensation

Subject: Polity

Context:

GST compensation payments to states are pending since April. At the GST Council meeting, the Centre suggested two options for borrowing by states to bridge shortfall. But many states are unconvinced.

Concept:

• Section 18 of The Constitution (One Hundred and First Amendment) Act, 2016 provides that Parliament shall by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the states for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.
• 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 (2017-22). 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.

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.