GST Compensation to States likely to get a Five-Year Extension

GST Compensation to States likely to get a Five-Year Extension

Witnessing a sharp decline in the GST revenue due to the pandemic and the following lockdown and disruptions in economic activities across the country, the States are likely to request the Centre for an extension in the GST compensation period, by up to five years beyond FY22.

The GST Council is expected to meet this month to discuss alternative compensation mechanisms, amid inadequate cess collections. Reports said that the States may write to the 15th Finance Commission, seeking the extension. They are likely to point out the challenge in meeting routine expenditure after 2022, in the absence of any compensation.

Coming out of the first GST Council taking place against the backdrop of COVID-19 pandemic, Finance Minister Nirmala Sitharaman said that the Council decided to meet again in July with single-point agenda to discuss compensation cess.
“If there is a need for borrowings to meet compensation to states, who are going to borrow. How we are going to pay for it…,” she said about next meeting of the Council, hinting that fall in revenues has become a big cause of concern for the Centre to meet its liability towards the states as per GST legislation.

Under GST law, states are guaranteed full compensation for any revenue loss for the first five years after the introduction of the goods and services tax (GST) in July 2017. The compensation is the gap between the actual revenue collected and projected revenue. The projected revenue is revenue growth of 14 per cent for states per year over the base year 2015-16.

As per the GST Act, full compensation to the states has to be paid for a period of five years till FY22 only through the compensation fund that gets its funds through the levy of GST compensation cess on few items. However, with the fund not getting enough collections since August 2019, GST compensation to states have been delayed with Centre now looking at getting GST Council nod for a mechanism to finance the compensation.

After February, when the Centre released GST compensation of Rs 19,950 crore for the months of October and November 2019, it has cleared dues for December, January and February only now.

The monthly compensation requirement for states in 2020-21 is being pegged at Rs 20,250 crore, government sources said, leaving a big gap between what needs to be paid and what is being collected. Even in FY21, monthly cess collections could be a low of Rs 7,000-8,000 crore or lower.

Source: TaxScan.

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