Centre pays ₹13,000 crore GST compensation to States, UTs

Our Bureau New Delhi | Updated on July 27, 2020

The Centre has released the last tranche of GST Compensation amounting over ₹13,000 crore to States and Union Territories. With this, the total pay-out for the year stood at more than ₹1.65 lakh crore which is almost 73 per cent more than cess collection of nearly ₹95,500 crore.

To release the compensation for 2019-20, balance of cess amount collected during 2017-18 and 2018-19 was also utilised. In addition, the Centre had transferred ₹33,412 crore from the Consolidated Fund of India to the Compensation Fund as a part of an exercise to apportion balance of IGST pertaining to 2017-18.

After the introduction of GST, the Centre had assured the States, through legislation, of full revenue compensation for the first five years. It is paid bi-monthly while last installment for any financial year is given in the next year. For the purpose of calculating the compensation amount, 2015-16 was assumed to be the base year. The growth rate of revenue for a State during the five-year period was assumed at 14 per cent a year.

Centre’s stress

Since the end of August 2019, the Centre has been in a precarious position while paying GST compensation to the States and UTs with legislative assemblies. On an average, the monthly GST compensation cess requirement was to the tune of ₹14,000 crore while the cess collection on an average was only ₹7,000-₹8,000 crore per month. Therefore, the only options left for the GST Council are to either bring more items under the cess base or to increase cess rate on the existing items. Another option is borrowing.

An increase in compensation cess on few items may yield only about ₹2,000-3,000 crore a year. Therefore, the other options are to either forego full cess compensation which is increasing at the rate of 14 per cent annually or to go ahead with whatever compensation is available. The Centre could also consider raising the tax rate on items by shuffling slab rates or borrow money to pay compensation to States.

As of now, no decision has been taken on any of such measures. Considering the present situation, barring cigarettes and tobacco products, increasing the cess or expanding the base of GST cess items could be counter-productive. Now, a special meeting of GST Council can take place any time to discuss possibility of borrowing to pay compensation,

In FY18 a total GST compensation cess of ₹62,611 crore was collected, of which ₹41,146 crore was released to the States/UTs as compensation. In FY19, ₹95,081 crore was collected, of which ₹69,275 crore was released to the States and UTs.

As on March 31, 2019, ₹47,271-crore GST compensation cess collected had remained unutilised after the release of GST compensation to the States and UTs in 2017-18 and 2018-19, according to the Finance Ministry.

Published on July 27, 2020

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