GST COMPENSATION

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Context

The government has released the entire amount of GST compensation payable to States due to date by releasing an amount of 86 thousand 912 crores rupees.

What is GST Compensation?

The introduction of the Goods & Services Tax (GST) required States and Union Territories (with Legislature) to subsume their sovereignty in a GST Council.
States had to cede almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed under the GST.
While the States would receive the SGST (State GST) component of the GST, and a share of the IGST (Integrated GST),
there will be loss in total revenue of a state on account of migration from Value Added Tax/Sales Tax to GST.

Thus, it was agreed that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years.
GST law prescribes that the financial year 2015-16 shall be taken as the base year for the purpose of calculating compensation and States were assured of a 14 per cent growth in revenues every year.

How is it funded?

In order to mobilise resources for compensation, a cess is being levied on such goods, as recommended by the Goods and Services Tax Council, over and above the GST on that item.It is levied on so-called ‘demerit’ goods.
And it is called compensation cess.
As on date, compensation cess is levied on products such as pan masala, tobacco, aerated waters and motor cars apart from coal.

Who pays compensation to whom? When?

The consumer is required to pay for compensation. It is collected by the Centre which releases it to States.
The proceeds of the compensation cess is credited to a non-lapsable fund known as the Goods and Services Tax Compensation Fund in the public account.
All amounts payable to the States as compensation are released bi-monthly, provisionally, from said fund against figures given by the Central accounting authorities.
Final adjustments are done after receiving audited accounts of the year from the Comptroller and Auditor General of India.

For how long will it be paid?

According to the law, it will be paid for five years from the date GST came into effect; i.e. till June, 2022.

Why are States demanding an extension of the compensation?

States say that pandemic has affected revenue collection.
At the same time, their expenses have gone up and they expect higher deficit as revenue growth is low.
Considering all these, States are seeking an extension of compensation for five more years. Any decision, in this regard, has to be taken by GST Council.

Back-to-back loan arrangement for Compensation

The economic impact of the pandemic led to higher compensation requirement due to lower GST collection and, at the same time, lower collection of GST compensation cess.
Accordingly, in FY21, the Centre had borrowed Rs 1.1-lakh crore under a special window and passed it on to the States as back-to-back loan.
This was meant to help States meet the resource gap due to short-release of compensation on account of inadequate balance in the compensation fund.
The Centre says it is committed to releasing full GST Compensation to the States/UTs as per law for the transition period by extending the levy of compensation cess beyond 5 years to meet the GST revenue shortfall as well as servicing the loan borrowed through a special window scheme.

Read: https://www.iasgyan.in/daily-current-affairs/goods-and-services-tax-gst