States demand extension of GST compensation for another 5 years

Q What is the context  ?

A 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.

Q  What is GST?

A 

• GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
• GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
• 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).

Q  What is Compensation under GST regime or  GST Compensation Cess?

A 

• 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.

Q Why is the compensation necessary?

 A

• States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
• GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
• Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

Q How is GST compensation Distributed ?

A 

• The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
• The compensation fund so collected is released to the states every 2 months.
• Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula