Extending the GST compensation

Just a day ahead of the 46th meeting of the GST Council on December 31, the Finance Ministers of several States had a pre-Budget interaction with the Union Finance Minister and demanded that the GST compensation scheme be extended beyond June 2022, when it is set to expire. Citing the impact of the COVID-19 pandemic on the overall economy and more specifically States’ revenues, the States including Tamil Nadu, Kerala, West Bengal, Rajasthan and Chhattisgarh stressed that while their revenues had been adversely impacted by the introduction of GST, the hit from the pandemic had pushed back any possible rebound in revenue especially at a time when they had been forced to spend substantially more to address the public health emergency and its socio-economic fallout on their residents.

THE GIST

  • Ahead of the 46th meeting of the GST Council , Finance Ministers of several States at a pre Budget interaction with the Union Finance Minister demanded that the GST compensation scheme be extended beyond June 2022 .
  • The adoption of GST was made possible by States ceding almost all their powers to impose local – level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed into the GST . This was agreed on the condition that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years that is set to end in June 2022 .
  • With the finances of most States having been severely hit in the wake of the pandemic , States have been hard pressed to find ways to garner the resources to meet the essential and additional spending necessitated by the public health crisis.

What is the GST compensation?

The Constitution ( One Hundred and First Amendment ) Act , 2016, was the law which created the mechanism for levying a common nationwide Goods and Services Tax ( GST ) . The adoption of GST was made possible by States ceding almost all their powers to impose local level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed into the GST. While States would receive the SGST (State GST ) component of the GST , and a share of the IGST ( Integrated GST ) , it was agreed that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years that is currently set to end in June 2022. This corpus in turn is funded through a compensation cess that is levied on so called ‘ demerit ‘ goods . The computation of the shortfall is done annually by projecting a revenue assumption based on 14 % compounded growth from the base year’s ( 2015-2016 ) revenue and calculating the difference between that figure and the actual GST collections in that year .