All you wanted to know about compensation cess

Satya Sontanam | Updated on December 17, 2019

In recent weeks, a skirmish has broken out between Opposition-ruled States, who have been complaining about the Centre dragging its feet on the release of GST compensation cess, and the incumbent government. As per reports, there’s high expectation among State Finance Ministers that the issue of compensation cess will be discussed at length in the GST Council meeting this week. But ahead of the Council meet, the government yesterday released ₹35,298 crore to States.

What is it?

Compensation cess was introduced as relief for States for the loss of revenues arising from the implementation of GST. States, in lieu of giving up their powers to collect taxes on goods and services after local levies were subsumed under the GST, were guaranteed a 14 per cent tax revenue growth in the first five years after GST implementation by the Central government. States’ tax revenue as of FY16 is considered as the base year for the calculation of this 14 per cent growth. Any shortfall against it is supposed to be compensated by the Centre using the funds specifically collected as compensation cess.

Compensation cess is levied on five products considered to be ‘sin’ or luxury goods. For example, SUV vehicles (more than 4 metres) are charged 50 per cent GST, of which the GST tax rate is 28 per cent and the compensation cess is 22 per cent. The collected compensation cess flows into the Consolidated Fund of India, and then transferred to the Public Account of India, where a GST compensation cess account has been created. States are compensated bi-monthly from the accumulated funds in this account.

Why is it important?

States such as Delhi, Punjab, Kerala, West Bengal and Rajasthan have been raising concerns that, hitherto, compensation cess pertaining to months beginning from August 2019 was not released by the Centre.

Replying to the concerns, the Finance Minister in the Rajya Sabha session held on December 12 agreed that there has been a delay in releasing compensation to States; but she said that, so far in FY20, Centre paid States a compensation cess of ₹9,783 crore over and above the actual cess collections. In the same debate, she said that GST cess collection in 2017-18 — the first year of GST implementation — was ₹62,596 crore, out of which ₹41,146 crore was released to States. In the subsequent year, FY18-19, cess collection was ₹95,081 crore and ₹69,275 crore was released to States. In the current fiscal, ₹55,467 crore has been collected till October 31, and ₹65,250 crore paid to States. With an excess of ₹9,783 crore over collections, the Finance Minister implied there was no balance in the accumulated fund. Though she has been pointing to the above numbers to claim that the Centre has paid out whatever it collected, the States still complain of outstanding dues.

As per the data available on Controller General of Accounts, compensation cess collected for the first half of FY20 was just 43 per cent of budgeted cess amount of ₹1,09,343 crore for FY20. In addition to the slowing economy, the reduction in the effective GST rate from around 14.4 per cent in May 2017 to 11.6 per cent in July and September 2019 could be the reason for falling GST collections, that have cut into compensation cess as well.

There have been reports that the government has written to State GST officers, asking for suggestions from State governments on ways to increase GST revenues in the backdrop of their demands for the cess.

Why should I care?

With States depending heavily on funds from the Centre to meet their public expenditure, any impediments in the flow of funds from Centre will impact the quality of services provided by your State government. If the GST Council decides to increase the rates of compensation cess or stretch the period for which States are compensated, this may mean that goods taxed at the highest GST rate of 28 per cent will continue to pinch your pocket. Select vehicles, tobacco and aerated drinks, apart from coal, are levied a compensation cess.

The bottomline

Compensating for the delay in releasing compensation cess might burn a hole in your pocket.

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Published on December 17, 2019

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