The Government has sought approval from the Parliament to pay around Rs 11,000 crore towards compensation to States and Union Territories. This is first installment of compensation for lowering Central Sales Tax (CST) which in turn will also help in introduction of Goods & Services Tax (GST) from April 1, 2016.

This amount is the part of final Supplementary Demands for Grants for the current fiscal year ending on March 31 tabled in the Parliament on Monday. This involves total additional expenditure of Rs 36,953 crore. Out of this, over Rs 17,700 crore will be met through savings while remaining around Rs 19,200 crore will be net cash outgo. In other words, net cash outgo implies actual fresh expenditure.

CST Compensation

There are two types of compensation-past and future-for the states. The past compensation is due to lowering of Central Sales Tax (a tax levied on the inter-state trade). Here, total amount due is around Rs 34,000 crore. This used to be bone of contention in bringing all the States on board for GST. Now, the Centre has agreed to pay the entire amount in three installments.

Accordingly, the Government has sought approval from the Parliament for the first instalment to be paid by March 31. Though fiscal situation has not been very good, still the Government has managed to find money through saving on the account of subsidy and also in plan expenditure, besides transfer of entire RBI surplus of Rs 52,679 crore for 2013-14 to the Centre.

For remaining dues the Finance Ministry has made a provision of Rs 15,000 crore for fiscal year 2015-16 (April 1, 2015-March 31, 2016). After these two installments, the Government will have option either to pay balance Rs 8,000 crore in the fiscal year, 2016-17 or to seek Parliamentary nod for additional expenditure in the next fiscal itself. But it will depend upon buoyancy in revenue next year.

The second type of compensation will be taken into consideration only after GST is implemented. There is an agreement that Centre will compensate States for loss of revenue arising on account of implementation of the GST for a period up to five years.  A provision in this regard has been made in the Constitution Amendment Bill as demanded by the States. The compensation will be on a tapering basis, i.e. 100 per cent for first three years, 75 per cent in the fourth year and 50 per cent in the fifth year.

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