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States demand extension of GST compensation for another 5 years

  • Posted By
    10Pointer
  • Categories
    Polity & Governance
  • Published
    3rd Jan, 2022

Context

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).