Under the Goods and Services Tax (GST) law, the centre would compensate the states for the loss of revenue occurring due to the state laws merging with the central GST law.
The GST law was effected from 1 July 2017. The compensation for states was fixed at 14% based on the revenue for the financial year 2016-17. The fund was accumulated through a levy of a cess on cigarettes, tobacco products, automobiles, aerated water and coal.
The compensation was scheduled for release every two months but was overdue since August 2019. The Central Government has been under pressure from various state governments to release the payment. Accordingly, the Central Government released Rs 35,298 crore two days before the 38th GST Council meeting.
Earlier, on 12 December 2019, the Finance Minister had mentioned that out of a total cess of Rs 62,596 crore collected in FY 2017-18, Rs 41,146 crore was released to the states.
The balance of Rs 15,000 crore was accumulated in the compensation cess fund. In FY 2018-19, Rs 95,081 crore was collected, and Rs 69,275 crore was released to the states. But, according to a verbatim statement by the Finance Minister in the Rajya Sabha, the accumulated balance in the fund was zero. Thus, it is not clear how the money was paid without any accumulated balance.
Further, the cess collections in the ongoing financial year from April 2019 till October 2019 were Rs 55,467 crore. However, the compensation released for the same period was Rs 65,250 crore. Thus, a sum of Rs 9,783 crore was released above the cess collected.
The delay in payment of the compensation cess to the state governments has been due to lower than expected GST collections. The Finance Minister acknowledged that it is the state government’s right to receive the compensation due under the GST law. The minister attributed the lower collections to natural calamities and slowdown in the economy.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.