The Finance Ministry has notified the extension of levying compensation cess under GST regime till 2026. However, this does not mean States will continue to get compensation till that period. Levying of cess was coming to end on June 30.

“The period for levy and collection of cess under sub-section (1) of Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017 shall be up to the 31st March, 2026,” a notification issued by the Finance Ministry said.

Cess is levied on certain goods such as fossil fuel-based automobiles which fall into the category of 28 per cent and collected in a fund called compensation fund.

As per Section 18 of the Constitution (101st) Act, 2016, Parliament shall, by law, on the recommendation of the GST Council, provide compensation to States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years from the date of its implementation. During the transition period, the States’ revenue is projected at 14 per cent per annum over the base year revenue of 2015-16.

Bi-monthly GST compensation to States for the period 2017-18, 2018-19 was released on time out of the compensation fund. As the States’ protected revenue has been growing at 14 per cent compounded growth whereas the cess collection did not increase in the same proportion, Covid-19 further increased the gap between projected revenue and the actual revenue receipt including a reduction in cess collection.

Measures to meet the shortfall

To meet the resource gap of the States due to the short release of compensation, the Centre has borrowed and released ₹1.1-lakh crore in 2020-21 and ₹1.59-lakh crore in 2021-22 as back-to-back loans to meet a part of the shortfall in cess collection. All the States have agreed to the above decision. In addition, the Centre has also been releasing regular GST compensation from the fund to meet the shortfall.

As interest and principal on back-to-back loans would be paid from the cess itself, the cess that would be collected after July 1, 2022 up to March 31, 2026 would be used to pay back the loan and also for arrears of compensation (if any).

“No cess would be available for distribution to States till 2026,” a senior government official clarified. This means the use of cess for debt servicing and provision under the law to provide compensation only for five years, thus means States and Union Territories (with legislature) will not get compensation even after extension of levying cess.

Issue raised last year in meeting

On May 31, the Centre said it has released the entire amount of GST compensation payable to States to date by releasing an amount of ₹86,912 crore. This decision has been taken despite the fact that only about ₹25,000 crore is available in the GST Compensation Fund. “The balance is being released by the Centre from its own resources pending collection of cess,” a statement from the Finance Ministry said.

Now, States are seeking an extension for at least three more years beyond the June 30 deadline. This issue had surfaced in the Lucknow meeting of the Council last year, too, but no consensus was arrived at.

Subsequently, during the pre-Budget meeting and also during the last Council meeting in December, the States raised the demand again. Officials admitted that the issue of compensation will be in focus in the next week’s meeting of the council.