The article starts off with the latest developments related to the GST council’s communication to all States. It mentions that the central government might not be able to compensate for losses resulting from the implementation of the Goods and Services Tax (GST). The GST Council, a Constitutional body, is chaired by the Union Finance Minister and includes the Minister of State for Finance/Revenue and finance ministers of all States. Their task is to make recommendations on all vital issues associated with the Goods and Services Tax.
About GST and GST Council
Adopted on 1st July 2017, after the enactment of the 101st Constitution Amendment Act, 2016, the Goods and Services Tax (GST) merged a vast number of central and state indirect taxes into one single tax. The GST Council, as explained earlier, provides necessary guidance about GST and its implementation. The Centre had promised compensation to the States for any shortfall in tax revenue due to GST implementation for a period of five years. This pledge influenced many reluctant States to agree to the new indirect tax regime.
Compensation Cess and Distribution to States
According to the GST Act, states are guaranteed compensation for any revenue shortfall under 14% growth for the first five years ending 2022 (base year 2015-16). GST compensation is paid out of Compensation Cess every two months by the Centre to states. Collected from the supply of select goods and services till 1st July 2022, except by those who export specific notified goods or have opted for the GST composition scheme, the Compensation cess is then remitted to the central government. Subsequently, it is distributed to the states by the central government.
However, the Centre has already delayed compensating states for the shortfall in GST revenues for August-September 2019, payment for which was due in October 2019. Several states expressed concerns about this delay.
Revenue and Compensation Status
| Items | Budgeted Amount | Collected Amount |
|---|---|---|
| GST Collections | ₹6,63,343 crore | 50% in the first eight months |
| Compensation Cess Collections | ₹1,09,343 crore | ₹64,528 crores |
The Centre collected ₹64,528 crore in compensation cess during April-November 2019 and compensated states with ₹45,744 crore for April-July. However, payments for the subsequent months were withheld in anticipation of a shortfall in collections.
Impact and Way Forward
This payment delay hampers states’ finances, especially during a slowdown in economic growth. It is essential to boost economic growth and find ways to increase GST collections. The GST Council has requested states to provide inputs and proposals concerning items under the exemption, GST, and compensation cess rates on various items by 6th December 2019. Owing to the fact that cess is imposed only on luxury and sin goods under GST, any approach to generate more cess collections would involve imposing a higher cess on these items or tinkering at the topmost tax slab of 28% under the GST regime.
Fiscal Impact and Future Course of Action
A decline in the Centre’s tax receipts affects states more since the absolute amount they receive as per the devolution formula suffers. In such a situation, delays in paying compensation to states, as guaranteed by the GST Act, make it harder for them to meet their finances. Hence, there is an urgent need to boost the economic growth of the country while contemplating ways to enhance GST collections.
Source: TH
