GST Compensation Cess

When the GST regime was introduced, the central government promised to pay compensation for any loss of revenue in the evolutionary phase of five years. According to the information shared in the Parliament recently, Rs 210.14 crore are due to Jammu and Kashmir (April-June 2022) and for all states/UTs, the cumulative figure is Rs 17176.4257 crores.

For the purpose of payment of compensation to States for any loss of revenue arising on account of implementation of GST for five years, a GST Compensation Cess is levied on select items under Section 8 of the GST (Compensation to States) Act, 2017. This, according to the information by the central government, is transferred into a non-lapsable Fund known as GST Compensation Fund which forms part of the Public Account of India as provided in Section 10(1) of the Act. The loss on account of introduction of GST is calculated as per Section 7 of the Act and is fully paid out of the GST Compensation Fund as per section 10(2) of the Act. As per provisions of GST (Compensation to States) Act, 2017 and taking into account Rs 1.10 lakh crore for FY 2020-21 and Rs 1.59 lakh crore for FY 2021-22 released to States/UTs as back to back loan in lieu of GST compensation, entire GST compensation dues of States/UTs has been cleared by Central Government for period up to 31 May 2022. This decision had been taken despite the fact that only about Rs 25,000 crore was available in the GST Compensation Fund. The balance around Rs. 62,000 crore was released by the Centre from its own resources pending collection of Cess.

Pertinently, at the time of the introduction, it was hoped that the tax structure would stabilise in the first five years. However the reform is still in transition.

The Central Government has stated in the parliament that it is committed to payment of GST compensation to States/UTs for five years as per Constitutional provisions.

Also, as per section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. The government needs to work out this aspect because the transition to GST is still underway and in turn will provide comfort to States/UTs to partake in the reform.


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