The Centre on Thursday released one more tranche of GST Compensation amounting to ₹36,400 crore to States. With this over ₹1.50 lakh crore has been released for FY 2019-20.

“Taking stock of the current situation due to Covid-19 where State Governments need to undertake expenditure while their resources are adversely hit, the Central Government has released the GST Compensation of ₹36,400 crore to the States/UTs with Legislature for the period from December, 2019 to February, 2020 on June 4,” the Finance Ministry said. This is second tranche of payment within 15 days. With this compensation for entire FY 2019-20 is completed.

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.

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.

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. It is expected that this issue could come up for discussion during next GST Council meeting, expected to take place next week.

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.

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