Under the existing GST Act compensation for shortfall of GST collection over an agreed formula is payable by the centre for the first five years of the operations of the new tax system from July, 2017 to June, 2022. This is paid through collection made on account of cess levy on certain luxury or sin goods like Car, aerated drinks , Cigarettes / Pan Masala. Supply of services is not subject to cess except in cases of on transfer of right to use of goods which are subject to cess and lease of motor vehicles.
The term of cess is co- terminus with compensation liability with the Centre. So, the Council should withdraw cess after completion of five years . But with Covid presenting different challange before the governments and has lead to States bleeding over GST collections, the compensation needs of the Centre has grown manifold.
As cess could not cover this high level of compensation needs this year and may be in next year, a talk is going on for extending the levy of cess beyond June, 2022.
As per the Centre’s projection, the total amount expected to be collected from Compensation Cess would be to the tune of Rs 65,000 crore in FY 21 while the total compensation payable to all States and union territories may be to the tune of Rs 3,00,000 crore. So there is a total shortfall of Rs 2,35,000 crore expected this year.
The Centre wants this shortfall be met through extra borrowings under special dispensation by the states while their dues get settled after June, 2022 by extending the compensation cess levy.
As per the Government sources the Government is readying the draft GST Compensation Amendment Bill to extend the cess levy period by 2 years to pay off borrowings to compensate states. With the cess will be applicable till June, 2024 instead of the June, 2022.
The draft amendment bill is expected to be discussed on October, 5, 2020 by GST Council along with the borrowing options.
With this the consumers need to be ready to continue to spend more on purchase of car, aerated drinks, cigarettes/Pan Masala. It is worth noting here that Motor vehicles are subjected to cess rate upto 22% depending upon type of vehicle. Also aerated drink are subject to cess rate of 12%. The rate of 204% being applicable to Gutkha.
It may be noted here that such cess rate is applicable on value of supply and thus the total GST payable on such goods is the value of supply X (GST rate + Cess rate).
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