The Centre has paid the entire amount of Goods and Services Tax (GST) compensation due to States up to May 31 by releasing an amount of ₹86,912 crore. The payment included a contribution from its own coffers beyond the ₹25,000 crore balance in the GST Compensation Fund.
- This was being done to assist States in managing their resources and ensuring that their programmes, especially entailing capital expenditure, could be implemented successfully during the financial year.
- As a result, the States were now only owed GST compensation for one month — June 2022. States had been guaranteed a certain level of revenue for the first five years of the GST regime, which was introduced in 2017.
- This decision has been taken despite the fact that only about ₹25,000 crore is available in the GST Compensation Fund.
- The balance is being released by the Centre from its own resources pending collection of cess. The Compensation Cess is levied over and above the peak 28% rate on luxury or ‘sin’ goods, including cars.
What is the GST compensation?
- The Constitution (One Hundred and First Amendment) Act, 2016, was the law which created the mechanism for levying a nationwide GST. Written into this law was a provision to compensate the States for loss of revenue arising out of implementation of the GST.
- While the States would receive the SGST (State GST) component of the GST, and a share of the IGST (Integrated GST), 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 that is set to end in 2022. This corpus in turn is funded through a compensation cess that is levied on so-called ‘demerit’ goods.
- The computation of the shortfall — the mechanism for which is spelt out in Section 7 of the GST (Compensation to States) Act, 2017 — is done annually by projecting a revenue assumption based on 14% compounded growth from the base year’s (2015-2016) revenue and calculating the difference between that figure and the actual GST collections in that year.