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States demand extension of GST compensation for another 5 years

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  • Categories
    Polity & Governance
  • Published
    3rd Jan, 2022


Many states have demanded that the GST compensation cess regime be extended for another five years and the share of the Union government in the centrally-sponsored schemes be raised as the COVID-19 pandemic has impacted their revenues.

Compensation under GST regime: GST Compensation Cess

  • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
  • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
  • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
  • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

States Concerns

  • Revenue Shortfall: The state’s GST revenue gap in 2020-21 is expected to be about 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore.
  • Economic Slowdown: At a time when growth is faltering, the delays in paying compensation to states as guaranteed by the GST Act will make it more difficult for them to meet their own finances.
  • Decreasing Centre Devolution: Most states are of the view that the Centre’s share in centrally-sponsored schemes has gradually reduced and states' share has increased.
    • Due to this, their most significant demand is increasing share in centrally-sponsored schemes.

What is GST?

  • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
  • The GST became applicable from 1st July 2017 after the enactment of the 101st Constitution Amendment Act, 2016.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).