What is GST Compensation, how does it work?

The law states that the FY 2015-2016 will be undertaken as the base year for the reason of calculating compensation and States were made sure of a 14% growth in revenue every year.

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What is GST Compensation, how does it work?

GST compensation

The establishment of the Goods & Services Tax (GST) needed States and Union Territories (with Legislature) to include their sovereignty in a council of GST, increasing the concern of loss on account of migration from VAT or Sales Tax to GST.

Also Read: PHD Chamber Urges the GST Council to Rationalize GST Rates

Keeping this as a matter of concern, Section 18 of the Constitution (One Hundred and First Amendment) of 2016 states: “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.” In a similar manner, the Parliament implemented a law: GST (Compensation to States) Act, 2017. The law states that the FY 2015-2016 will be undertaken as the base year for the reason of calculating compensation and States were made sure of a 14% growth in revenue every year.

Funding process

To summon resources for compensation, a cess is being imposed on such goods, as suggested by the Goods and Services Tax Council, beyond and above the GST on that specific good. Compensation cess is imposed as on date on goods like tobacco, pan masala, aerated waters, and motor parts except for coal.

When and who pays the compensation?

The consumer is needed to pay for compensation. It is further collected by the Centre which then releases it to States. The proceeds of the compensation cess shall be credited to a non-lapsable fund called the Goods and Services Tax Compensation Fund in the public account. Final adjustments shall be done after getting audited accounts of the whole year from the Comptroller and Auditor General of India.

Tenure of payment

As per the law, it must be paid for 5 years from the date GST came into action which is till June 2022. Moreover, cess shall continue to be imposed for repayment of loans undertaken to compensate States during Financial years 2021 and 2022.

Back-to-back loan arrangement for compensation

The economic effect of the Covid-19 pandemic led to high compensation needs due to lower GST collection and at the same moment, lower collection of GST compensation cess. The concern of GST Compensation to States was reflected in the 41st and 42nd GST Council meetings.

In the same manner, in the financial year 2021, the Centre had borrowed Rs 1.1 lakh crore under a special window and gave it on to the States as a back-to-back loan. This was done to help States meet the gap of resources due to the short release of compensation on account of not adequate balance in the compensation fund.

Following deliberations in the 43rd council meeting, the Centre had taken Rs 1.59 lakh crores from the market through a specific window in the ongoing fiscal and gave it to the states and UTs as a back-to-back loan, same as last year.

Reason for states for demanding extension of the compensation

States state that their revenue will improve further on 2 counts due to the establishment of the GST and due to the pandemic, which has affected revenue collection. At a similar time, their expenses have increased, and they think of a higher deficit as revenue growth is certainly low. After considering all these, the States are asking for an extension of compensation for 5 more years. In this regard, any decision must be taken by the GST Council.

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What is GST Compensation, how does it work?
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The law states that the FY 2015-2016 will be undertaken as the base year for the reason of calculating compensation and States were made sure of a 14% growth in revenue every year.
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THE POLICY TIMES
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