According to reports, the Centre may shortly disburse $30 billion as GST (goods and services tax) compensation for June 2022, the final month of the Union government’s stipulated five-year compensation period.
The sources indicated that because there is not enough cash in the designated cesspool that is tapped for this reason, the Center will probably release the compensation amount from its own revenue stream.
The Center is concerned that capital spending by states, which often reduces revenue-generating expenses like interest payments and salaries, doesn’t stall due to a lack of funding.
If states produce reconciled statistics approved by their auditor generals, they may also release some arrears against claims pertaining to earlier financial years.
The sum may be released before to the GST Council meeting next month, however an official stated that no formal decision has yet been made on the date of the release. The cesspool doesn’t have a lot of corpora. If compensation for June is to be paid out, the Central Government may decide to do so from its own finances (to be offset by future cess receipts), is what an official added.
The Center released ‘86,912 crore on May 31 by drawing on its resources to the tune of ‘62,000 crore, or the whole amount of GST compensation payable to states up to May 2022, to help relieve the liquidity of states to step up capital investment. Only about ‘25,000 crore was available in the GST Compensation Fund when this decision was made.
For the first five years of the tax, which ended on June 30, 2022, the GST Compensation to States Act provided for the release of compensation against a 14% annual rise above revenues from taxes subsumed in GST.In order to make up for the state’s shortfall in GST revenue for a period of April through June 2022 interest on loans taken earlier to make up for states’ shortfalls, the Centre has allocated ‘1.2 trillion in compensation cess collection for FY23.
To make up for some of the shortfall in cess collection, the Centre took out back-to-back loans totalling ‘1.1 trillion in FY21 and ‘1.59 trillion in FY22.
Center announced on June 24 that it would continue to levy collect GST compensation cess until March 2026 in order to pay back the back-to-back loans given to the states, as well as to pay the GST compensation due in June 2022 and any back taxes from prior financial years based on AG reconciled data.
The Goods and Services Tax has been in place in India for five years, and the government’s anticipated transition period to the new tax system is now over. The Centre is anticipated to stop paying compensation to states after this transitional period is through. This compensation was put in place to make up for states’ revenue shortfalls during this time.
State governments still urgently want the compensation cess, which is the issue. Yet why?
Prior to the establishment of the GST, states that produce or export goods also used to levy central sales taxes (CST) of up to 2% on interstate transactions. Following the adoption of the GST, the share of CST in state revenue decreased from 4.16 percent in FY17 to 0.95 percent in 2020-21 (Revised Estimate), according to a report by India Ratings.
During FY18-FY21, state GST made up 55.4% of their total tax collection, down from FY14-FY17 when it made up 55.2%. According to the research, this indicates that there was no additional advantage to the states’ tax collection from the implementation of the GST.
Additionally, between FY18 and FY21, SGST experienced an average growth rate of 6.7%, which is lower than the 9.8% increase experienced by the levies that made up GST between FY14 and FY17.
When the GST was first implemented, the states’ revenue that the GST absorbed was safeguarded for a five-year transition period (2017-18 to 2021-22). This was done under the presumption of constant revenue base growth from 2015–16 of 14% annually. Additionally, any shortfall would be covered by an additional tax (compensation cess) on sinful or opulent items.
Despite the Centre’s compensation cess collections being enough in 2017–18 and 2018–19, a shortfall in cess collection in 2019–20 was caused by the slowdown in the economy. According to the Reserve Bank of India, this will rise even more in 2020–2021 as a result of the Covid-19 pandemic’s devastating impact on public budgets.
