Central Govt to release 35,000 crore to states as GST compensation

Under the Goods and Services Tax (GST) statute, states are given 5-year revenue loss compensation if their revenue does not increase 14% on the 2015-16 base year. The Center will allocate another Rs 35,000 crore to states soon to cover the revenue loss due to GST rollout.

In 2017-18, 2018-19 and the first four months of the current fiscal year, there were no gaps between the Center and states on compensation payment. However, with revenue mop-up from payments cessation falling insufficient, the Center held back funds transfer to states beginning in August for revenue shortage.

After that, states raised the issue with the Centre, and Rs 35,298 crore was issued in December 2019 as reimbursement for August-September. The Centre will soon move another Rs 35,000 crore from India’s consolidated fund (CFI) in 2 instalments to the reimbursement cess fund. The first tranche will be an October-November compensation payment.

The excess collection of compensation cess in 2017-18 and 2018-19 was earlier deposited at the CFI, and this will now be transferred back to the compensation fund. In her Budget speech, Hon’ble Union Finance Minister Nirmala Sitharaman said it’s decided to transfer balances in two instalments to the GST Compensation Fund.

Also Read: Hacking Into GST Database Can Result in 10-Year Imprisonment

Taxes are levied under the GST system below slabs of 5%, 12%, 18% and 28%. A cess is levied on luxury, demerit and sin goods in addition to the highest tax rate. The proceeds from the cess are used to reimburse states for any loss of revenue. After introducing GST on July 1, 2017, the Centre has issued about Rs 2.11 lakh crore as GST compensation to states so far.

For July 2017-March 2018 Rs 48,785 crore was released, while Rs 81,141 crore was paid to states during April 2018-March 2019. Last year Rs 17,789 crore and Rs 27,956 crore were issued for April-May and June -July. Also, for August-September 2019, Rs 35,298 crore was paid to states as compensation.

The department of revenue is looking to increase GST revenues which will solve the issue of state compensation payments. Also, they are looking at rate rationalisation, fixing inverted duty structure problems and improving enforcement for that. This will ensure that the requirement of compensation is less. Even the government is looking at monthly average GST collection of over Rs 1 lakh crore.

For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in