GST Compensation to States Last Updated : 11 Jul 2020

States who have suffered any losses due to the GST implementation will receive compensation according to the GST Compensation to States Bill which was passed in March 2017. This is for 5 years starting from the date the state implements the GST Act.

The Lok Sabha introduced the GST Compensation to States Bill in March 2017, and the bill was created to compensate states in case they have suffered any loss in revenue owing to GST implementation. The compensation offered by the bill will be for a five-year period starting from the date when the State GST Act is implemented by the state.

So far as the calculation of the compensation amount in any fiscal year is concerned, 2015-16 shall be considered as the base year. The revenue growth rate for any state over the course of the five years will be considered at 14% per year. The revenue of the base year comprises of the tax revenues of the state from central sales tax, state VAT, local body tax, octroi, entry tax, taxes on advertisements, taxes on luxuries, etc. However,the revenue of the base year will not include taxes related to the supply of certain petroleum products and alcohol for human consumption.

So far as the calculation of compensation and its release is concerned, the compensation that will be paid to a state must be calculated on a provisional basis and released at the completion of every two months. Moreover, a yearly calculation of the overall revenue will be done and it will be audited by the Comptroller and Auditor General of India.

A GST Compensation Cess could be charged on the supply of particular commodities and services, and the receipts from said cess shall be deposited to a GST Compensation Fund. The cap of the cess will be 135% in case of pan masala, Rs.4,170 + 290% per 1,000 tobacco sticks, Rs.400 per tonne in case of coal, and 15% for all other commodities and services including aerated water and motor cars.

In case any money remains unutilised in the Compensation Fund when the compensation period ends, it will be distributed as follows: 50% of the fund will be shared between the states in the ratio of the states’ revenues, and the other 50% will become part of the centre’s divisible tax pool.

States’ Finances Will Not be Hurt by GST – Centre

Among the main points discussed regarding the new GST regime is whether or not the finances of states would be affected by it, and if the centre would compensate the states for the losses they could potentially incur as a result of the new regime. Since GST is a tax that is based on the destination where the goods or services are supplied, the consuming states are expected to benefit from it. However, producing states such as Karnataka, Maharashtra, Haryana, Tamil Nadu and Gujarat may be adversely affected. The implementation of the new regime was objected by these states, resulting in the Centre agreeing to a formula which will see these states get compensated in case there is a revenue loss.

The Centre was advised by the 14th Finance Commission to ensure that states are compensated 100% for the loss in revenue following the implementation of the new regime during the first three years. The compensation provided during the fourth year will be 75%, while the compensation during the fifth year will fall to 50%. While states that demanded 100% compensation for all five years were disappointed, there was solace in the fact that at least the first three years will see them compensated in full.

Payment of Compensation

The implementation of GST has seen a number of cesses being subsumed, including the Krishi Kalyan Cess and Swachh Bharat Cess among others. However, the cess of crude oil and education cess on imported commodities will still be applicable under GST. The government, however, requires additional revenue to ensure that the affected states are compensated, which led the GST Council to a decision to impose extra cesses for five years on a few commodities that fall above the 28% tax bracket. The commodities which will attract the extra cesses include coal, tobacco products, motor vehicles (including all kinds of cars, yachts and personal aircrafts). The extra cesses charged on these products will not be applicable after five years, according to Arun Jaitley, the Finance Minister. It was also said that the states which incur losses will have to look out for alternative revenue sources.

News About GST compensation

  • Centre releases GST compensation worth Rs.36,400-crore to states

    The central government on Thursday released compensation worth Rs.36,400 crore to states for three months up to February 2020. The disbursement came ahead of the Goods and Services Tax (GST) Council meeting next week. The compensation has been released at a time when states are under severe stress due to the lockdown.

    It must be noted here that states have been up in arms with the government over non-payment of compensation dues. The government had earlier released Rs.1.15 trillion for the period between April and November 2019.

    05 June 2020

  • GST compensation of Rs.15,340 crore released for states by the Centre

    Even though the GST collections have been at a decline due to the COVID-19 crisis, the central government has released funds of Rs.15,340 crore to the states and Union Territories as GST compensation.

    Post the introduction of GST, the Centre had given an assurance to the states that through legislation, full revenue compensation for the first five years. The growth rate of revenue for a state was assumed at 14% in a year and the central government has not mentioned that the released funds were for which period. According to speculations, it is for December to January.

    According to government sources, the last release of GST compensation was at Rs.19,950 crore for states and Union Territories in February for October and November 2019. States have not been paid for the period of after October – November and the centre had released a total of Rs.1.20 lakh crore in 2019-2020 against a collection of Rs.95,000 crore.

    The central government can also be considering raising the tax rate on items by shuffling the rates of the slab or borrow money to pay the compensation to the states. In the financial year 2018, the GST compensation of Rs.62,611 crore was collected and Rs.41,146 crore was released as a compensation for states and Union Territories.

    22 May 2020

  • GST compensation due to all the states for the four-month period starting December 2019

    On Sunday, Union Finance Minister Nirmala Sitharaman stated that GST compensation is due to all the states for the four-month period of December-March. It must be noted that as per GST law, states are guaranteed to be paid for any loss of revenue in the first five years of the GST implementation from 1 July 2017.

    The central government started holding back fund transfer to states beginning August 2019 with the revenue mop-up from compensation cess falling. However, with states raising the issue Rs.35,298 crore was released in December for the month of August and September. The GST compensation for the months of October and November which amounted to Rs.34,053 crore was released in two instalments in February and April this year.

    18 May 2020

  • Central Government sanctions Rs.1,237 crore GST compensation arrears for Punjab

    For the months of July 2017 to March 2019, the central government has extended an amount of Rs.1,237 crore in the form of GST compensation arrears for Punjab. The Finance Minister of Punjab Manpreet Singh Badal mentioned in a letter to Finance Minister (Centre) Nirmala Sitharaman that the state has received the funds at a crucial time when the entire nation is facing a slowdown owing to the COIVD-19 crisis.

    The Centre has sanctioned an amount of Rs.12,857 crore earlier for Punjab in regard to the compensation for the period of July 2017 to March 2019 along with the clearance of arrears. With this amount, the total money sanctioned stands at Rs.14,094 crore.

    20 April 2020

  • GST compensation to states to be released by the government soon

    According to reports, GST compensation worth Rs.20,000 crore will be released by the government to states soon. This release of funds comes days after the government released Rs.17,287 crore to states as disaster funds.

    A stimulus package is also being worked on by the Prime Minister’s office and the Finance Ministry. The new package is expected to be announced soon as well. The package will be aimed at sectors affected by the coronavirus outbreak as well as urban and poor people. The economy has been affected by the 21-day lockdown. According to various officials who are working on the package, several factors are still under consideration. The status of the lockdown post 14 April 2020 is also being looked at. According to a top government official, authorisation has been given by the revenue department to settle the Rs.20,000 crore GST compensation that is pending to states. The funds will be released from the Consolidated Fund. In the Budget speed, the Finance Minister said that the GST compensation that pending in 2016-2017 and 2018-2019 will be settled in two instalments.

    12 April 2020

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