The monthly compensation requirement under the Goods and Services Tax is estimated at ₹26,000 crore during FY 2020-21, against ₹13,775 crore during FY2019-20

“There is a huge gap between collection of cess and its payment to the States/UTs. It’s an enormous amount which needs to be compensated through the Compensation Fund under GST Act year-on-year basis at an increase of 14 per cent annually per annum for two more fiscal years,” an informed source said. So far, the Centre has paid compensation for three fiscal years to the States/UTs since the rollout of GST in July 2017.

The total compensation released by the Centre for 2019-20 is ₹1,65,302 crore, whereas the cess collected for the same period was ₹95,444 crore. Therefore, the government has paid, on an average, monthly compensation cess of about ₹13,775 crore to the States/UTs in the last fiscal year 2019-20, while it was able to collect only an average of ₹7,953.6 crore a month.

Existing provisions

The Goods and Services Tax (Compensation to States) Act, 2017 provides for compensation to the States for the loss of revenue arising on account of implementation of GST. Compensation will be provided to a State for five years from the date on which the State brings its SGST Act into force. For calculating the compensation amount in any financial year, 2015-16 will be assumed to be the base year for working out the revenue to be protected. The growth rate of revenue for a State during the five-year period is assumed be 14 per cent per annum.

According to sources, one needs to underline that“...arising on account of implementation of goods and service tax...” The Covid-19 and the slowdown impact causing loss of revenue is not on account of implementation of GST. It’s a force majeure situation, which has to be collectively resolved by the entre and the States, according to the true spirit of the GST Act under the federal framework of the Constitution. It is not just the Centre’s responsibility, sources said, while adding that the GST Council will have to put its collective decision-making mechanism at work to resolve this critical issue.

It may be noted that the Attorney General has also said that there is no obligation on the Centre under the GST laws to compensate for the loss of revenue on account of natural disaster, Covid, or economic slowdown, etc as they are not related to GST implementation. Hence, the GST council has to decide how to meet the shortfall under such circumstances and not the Centre.

Amendment rejected

It may be noted that when the GST debate was going on in Parliament, an amendment by the Congress member KC Venugopal to pay the compensation from the Consolidated Fund of India, was rejected by Parliament.

Even the then Finance Minister (now late) Arun Jaitley categorically stated that compensation to the States due to shortfall in GST implementation cannot be paid from the Consolidated Fund of India. However, if required, market borrowing could be an option to compensate, which can later be repaid through the collection of cess.

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