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GST Compensation – Anguishes States – Way Forward

GST Compensation – Anguishes States - Way Forward

UPSC CSE Mains Syllabus: GS-3-  Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

GST Compensation – Anguishes States – Way Forward

States are agitated about the undue delay by the Centre in paying them the GST compensation, especially as they are starved of funding for fighting the Covid-19 pandemic. As per the GST Compensation Act, the Centre is mandated to compensate the states for loss of revenue on account of implementation of the GST for a period of five years. The compensation payments are to be funded by the Centre levying a cess on the GST on specified goods.

Working smoothly:

In the first two years after the introduction of GST in 2017, the scheme worked smoothly as collections under the cess far exceeded the compensation demand. In fact, the Compensation Fund built up a surplus of about Rs 47,000 crore in these two years.

Rise of issues:

  • A problem arose last fiscal (FY20) when the cess collections fell short of the compensation demand by as much as R70,000 crore.
  • The Centre did eventually pay the full compensation, but after long delays, in contravention of the stipulation in the Act that the compensation should be provisionally calculated and paid every two months.
  • While the dues for the months of December 2019 and January 2020 were paid in June 2020, those for February and March 2020 were paid in July.
  • The Centre met the shortfall in the cess collection by using up the surplus in the compensation fund and, then by dipping into the IGST balance parked in its consolidated fun

What is needed: 

  • The possible options for resolving this issue are:
  • expand the list of commodities for levy of cess or raise the rate of cess
  • GST Council borrowing to meet the shortfall in cess collections
  • allowing states additional market borrowings to the extent of the shortfall in compensation.
  • Centre to meet the shortfall from its consolidated fund.
  • The Centre’s undertaking to give that compensation is unconditional. 
  • The GSTcompensation Act 2017 guarantees a 14% annual growth in tax revenues for the states from the amount collected by them in 2015-16 for five years till 2022. This promise has to be kept.  
  • While the Act identified some cesses to finance such compensation, nowhere does the Act say that such compensation would be made only from the proceeds of that cess. 
  • Nor is such an interpretation in the spirit of the undertaking made by the Centre to bring the states on board to launch GST, to compensate them for any revenue shortfall.

The states themselves are deprived of adequate finances to boost their economy. Hence, it is time to look for alternatives. 

The Centre could raise special loans against future GST cess accruals in order to help meet its compensation promise to States.  

Given that states account for more than half of the total general government expenditure, the Centre on-lending its market borrowings to them is the best way to revive the economy. 

SOURCE:”Financial Express”


With the GST compensation issue affecting the finances of the states analyse whether the Centre can default on GST compensation to states? Also provide a way forward.