Digging deeper: On GST compensation

Context

The Centre has finally managed to pay States the compensation due to them for the previous year under the GST regime.
The last instalment of? 13,806 crore for March 2020 was paid out recently, taking the total payments for the year to ? 1,65,302 crore.

GST compensation to the states

To refresh, States were guaranteed compensation from the Centre for the first five years of the new indirect tax regime introduced in July 2017, for the revenues they lost after the shift from the earlier system where States had the power to levy some indirect taxes on economic activity.
This compensation assumed a 14% annual growth rate in a State’s revenue, with 2015-16 as the base year, and was to be paid out from a compensation cess levied on top of the specified GST rate on luxury and sin goods.
Compensation cess under GST last year was almost ? 70,000 crore less than the payments due to States.
This gap is likely to enlarge further this year with expected economic contraction denting GST collections as well.
Compensation cess inflows could shrink even more with people curbing discretionary spending on luxury goods in order to conserve capital or stay afloat in the pandemic-hit economy.
A little over half of the shortfall in last year’s cess kitty has been plugged by tapping cess balances from the first two years of GST implementation.
The rest has been conjured up from the Consolidated Fund of India by debiting Integrated GST (IGST) funds that were lying with the Centre.

GST council’s decision

At the last GST Council meeting in June, Finance Minister Nirmala Sitharaman had said the Council would convene again in July just to discuss the possible alternatives to deal with this particular conundrum.
The chief solution officials have been fleshing out is for the Centre to raise special loans against future GST cess accruals in order to help meet its compensation promise to States.
But with a third of the fiscal year almost over, it would help the Centre and the States to battle the virus more effectively if they had more certainty and clarity on the cash at their disposal.

Source: TH

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