GST Compensation to States

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.

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