Witnessing a sharp decline in the GST revenue due to the pandemic and the following lockdown and disruptions in economic activities across the country, it is expected that the States would request the Centre for an extension in the GST compensation period, by up to five years beyond FY22.
What is GST Compensation Cess
As per clause 18 of the Constitution One Hundred and First Amendment) Act,2016, Parliament shall, by law, on the recommendation of the GST 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.
Accordingly GST (Compensation to States) Act, 2017 was notified wherein the Centre has guaranteed the States for full compensation for any revenue loss for the first five years after the introduction of GST in July 2017. The compensation is the gap between the actual revenue collected and projected revenue. The projected revenue is revenue growth of 14 % for States per year over the base year 2015-16.
As per said Act, full compensation to the States has to be paid for a period of five years till FY22 only through the compensation fund that gets its funds through the levy of GST compensation cess on few goods viz Pan Masala, Tobacco and manufactured tobacco substitutes, coal, Aerated waters, Motor cars/ vehicles.
Shortage in collection of Compensation Cess
With the fund not getting enough collections since August 2019, GST compensation to States have been delayed with Centre now looking at getting GST Council nod for a mechanism to finance the compensation.
It is pertinent to mention here that after February, when the Centre released GST compensation of Rs 19,950 cr. for the months of October and November 2019, it has only cleared dues for December, January and February now.
The monthly compensation requirement for states in 2020-21 is being pegged at Rs 20,250 crore, government sources stated, leaving a big gap between the payment to be paid and amount collected. Even in FY21, monthly cess collections are expected to be as low as Rs 7,000-8,000 crore or even lower.
Proposed one agenda meeting of GST Council on issue of Compensation Cess
During the virtual media briefing after the 40th GST Council Meeting held on June, 12 , Finance Minister Nirmala Sitharaman said that the Council has decided to meet again in July with single-point agenda to discuss compensation cess. “If there is a need for borrowings to meet compensation to states, who are going to borrow. How we are going to pay for it…,” she said about proposed next meeting of the Council, hinting that fall in cess collection has become a big cause of concern for the Centre to meet its liability of compensation towards the States.
The GST Council is expected to meet this month to discuss alternative compensation mechanisms, considering inadequate cess collections. It is expected that the States may write to the 15th Finance Commission, seeking the extension. They are likely to point out the challenge in meeting routine expenditure after 2022, in the absence of any compensation. However any such extension would require an amendment in the Constitution according to which compensation can be granted only for a period of 5 years.
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TW Editorial Team comprises of team of experienced Chartered Accountants and Advocates devoted to spread the knowledge of GST amongst the various stakeholders.
