The Goods and Services Tax (GST) Council has failed again to reach an agreement on the contentious issue of borrowings to meet shortfalls in cess collections used to recompense the States for revenue losses from the indirect tax implementation.
This was the third meeting in a row that discussed compensation shortfall without a decision.
What’s the main point of contention between the Centre and states now?
The Centre says it is ready to help the States who have decided to borrow to bridge the cess shortfall.
But, few states have been demanding that the Centre must borrow instead of its push for the States to do so.
Why should the Centre pay states for GST loss?
The GST Compensation Act, 2017 guaranteed States that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
However, the economic slowdown has pushed both GST and cess collections down over the last year, resulting in a 40% gap last year between the compensation paid and cess collected.
States are likely to face a GST revenue gap of 3 lakh crore Rupees this year, as the economy may contract due to COVID-19, which Finance Minister Nirmala Sitharaman termed an unforeseen “act of God”.
What is compensation cess?
The modalities of the compensation cess were specified by the GST (Compensation to States) Act, 2017.
This Act assumed that the GST revenue of each State would grow at 14% every year, from the amount collected in 2015-16, through all taxes subsumed by the GST.
A State that had collected tax less than this amount in any year would be compensated for the shortfall. The amount would be paid every two months based on provisional accounts, and adjusted every year after the State’s accounts were audited by the Comptroller and Auditor General.
This scheme is valid for five years, i.e., till June 2022.
Compensation cess fund:
A compensation cess fund was created from which States would be paid for any shortfall. An additional cess would be imposed on certain items and this cess would be used to pay compensation.
The items are pan masala, cigarettes and tobacco products, aerated water, caffeinated beverages, coal and certain passenger motor vehicles.
The GST Act states that the cess collected and “such other amounts as may be recommended by the [GST] Council” would be credited to the fund.