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States worried over delay in GST compensation

Our Bureau New Delhi | Updated on November 20, 2019 Published on November 20, 2019

Post introduction of Goods & Services Tax, the Centre had assured States, through legislation, that revenue shortfall will be compensated fully for the first five years   -  Getty Images/iStockphoto

‘With the tax accounting for 60% of States’ income, the dues could disrupt budgets’

Five opposition-ruled States on Wednesday expressed concern over delay in GST compensation for the August-September period.

These States -- Punjab, Kerala, Delhi, Rajasthan and West Bengal -- said in a joint statement: “The GST compensation for the month of August and September, required to be paid by the Central government sometime in October, continues to be outstanding till date”. The States, under the banner of Empowered Committee of States’ Finance Ministers, met here. They alleged that no explanation has been offered for the delay. “As a result, the States are facing acute pressure on their fiscals, some are already resorting to other ‘ways and means’ or even overdrafts,” the statement added.

The States wanted the Finance Minister to look into the matter personally and release the compensation without any further delay. They suggested that the matter be placed on the agenda of the next meeting of the GST Council and a healthy mechanism be evolved to provide compensation with ‘due urgency and judiciousness’.

Post introduction of the Goods & Services Tax (GST), the Centre has assured the States, through legislation, that the revenue shortfall will be compensated fully for first five years. For the purpose of calculating the compensation amount in any financial year, 2015-16 was assumed to be the base year. The growth rate of revenue for a State during the five-year period is assumed be 14 per cent per annum.

The base year tax revenue consists of the State’s tax revenues from State Value Added Tax (VAT), central sales tax, entry tax, octroi, local body tax, taxes on luxuries, and on advertisements.

A GST Compensation Cess is levied on the supply of certain goods and services, as recommended by the GST Council to finance the compensation cess. It is levied on automobiles, tobacco and other luxury items, all of which attract GST at the rate of 28 per cent. According to the law, compensation is to be paid bi-monthly.

States’ argument

The States said that GST comprises nearly 60 per cent of revenue. They claimed that many States are already facing deficit up to 50 per cent of total GST. “Such huge deficits have the potential to disrupt the budget and planning processes in a host of areas literally bringing activities of the States to a grinding halt,” the statement said. They also reminded the Centre that assurance of GST compensation was a necessary enabler in States agreeing to subsume their fiscal sovereignty into GST.

Lower collections

The Centre is facing a tough time as the GST Compensation Fund is under stress. This happened due to lower-than-expected collection of GST. The gross GST revenue collected in October was ₹95,380 crore, which was 5.29 per cent lower than in October 2018. The government expects average monthly collection to be over ₹1-lakh crore. However, only three of seven months saw collection of over ₹1 lakh crore.

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Published on November 20, 2019
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