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GST Compensation Cess

Context:

The Centre has extended the time for levy of GST compensation cess by almost four years till March 31, 2026.

Relevance:

GS-III: Indian Economy (Taxation, Government Policies and Initiatives)

Dimensions of the Article:

  1. What is GST?
  2. What is GST Compensation Cess?
  3. Issue with GST Compensation Cess

What is GST?

  • GST is a destination-based indirect tax and is levied at the final consumption point.
  • Under it, the final consumer of the goods and services bear the tax charged in the supply chain.
  • GST is a transparent and fair system that prevents black money and corruption and promotes new governance culture.

GST Act

  • Goods and Services Tax (GST) Act came into effect in 2017.
  • Goods and Services Tax (GST) was introduced by the Government of India to boost the economic growth of India. GST is considered to be the biggest taxation reform in the history of the Indian economy.
  • The power to make any changes in the GST law is in the hands of the GST Council. GST Council is headed by the Finance Minister.
  • One hundred and first amendment act, 2016 introduced the GST in India in July 2017.

What is GST Compensation Cess?

  • 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.
  • GST (Compensation to States) Act, 2017 was enacted under which:
    • The percentage of annual revenue growth of a State has been projected to be 14%. If the annual revenue growth of a State is less than 14%, the State is entitled to receive compensation under the statute.
    • The compensation payable to a State shall be provisionally calculated and released at the end of every two months period.
    • The generation of revenue under the Act would happen through a GST Compensation Cess:
      • The cess comprises the cess levied on sin and luxury goods for five years.
      • The entire cess collected during the year is required to be credited to a non-lapsable Fund (the GST Compensation Cess Fund).
      • The collected compensation cess flows into the CFI and is then transferred to the Public Account of India, where the GST compensation cess fund has been created.

Issue with GST Compensation Cess

The issue arose when payments due for August-September 2019 were delayed. Since then, all subsequent payouts have seen cascading delays. The problem has aggravated and further compounded due to following reasons:

  • Persistent Economic Slowdown: The slowdown has impacted the demand and consumption levels and has thus dented the overall GST collections (both Centre and States).
  • Effect of the Pandemic: The pandemic has given an economic shock to the Indian Economy which has dented the tax collection expectations (including the collections from GST Compensation Cess) of both Centre and States.
  • Estimation of 14% revenue growth unrealistic: The high rate of 14%, which has compounded since 2015- 16, has been seen as delinked from economic realities. In the initial meetings of the GST Council, a revenue growth rate of 10.6% (the average all-India growth rate in the three years preceding 2015-16) was proposed but 14% revenue growth was accepted “in the spirit of compromise”.
  • As a result of these issues, the stalemate reached at a point where States were looking at the GST shortfall of Rs. 30,000 crore and the Centre being in no position to provide for it.

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October 2022
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