Home >Politics >Policy >Centre’s ability to pay GST compensation to states comes into spotlight
A file photo of finance minister Nirmala Sitharaman at the 35th Goods and Service Tax (GST) Council meeting. Photo: PTI
A file photo of finance minister Nirmala Sitharaman at the 35th Goods and Service Tax (GST) Council meeting. Photo: PTI

Centre’s ability to pay GST compensation to states comes into spotlight

  • GST compensation can only be given from the proceeds of cess levied on certain items
  • Surplus cess collected in previous years has been used for compensation in the current FY

NEW DELHI : State governments are unlikely to get full compensation in FY20 for their revenue shortfall from Goods and Services Tax (GST), Business Standard reported on Tuesday citing finance ministry officials.

The report said that GST compensation can only be given from the proceeds of cess levied on certain items. If there is a shortfall in cess collection, the law does not say that Central government’s GST proceeds can be tapped for the purpose. An email sent to Central Board of Indirect Taxes and Customs (CBIC) seeking comments on the issue remained unanswered at the time of publishing.

The central government has transferred 81,043 crore to states as compensation for GST revenue shortfall in this fiscal, minister of state for finance Anurag Thakur informed Rajya Sabha on 4 February. Up to December, the government collected 70,499 crore in GST cess, marginally more than what was collected in the same time a year ago.

The surplus cess collected in previous years too has been used for compensation in the current financial year. The centre expects to collect 98,327 crore by way of cess by 31 March 2020, as per union budget documents for FY21. The budget has scaled down the estimate of GST proceeds for FY20 by 10% from what was projected at the beginning of the year.

Nirmala Sitharaman had in the winter session of Parliament told the Rajya Sabha that the government was committed to honour the promise made in terms of GST compensation to states. The economic slowdown, which has had an adverse impact on revenue collections, has raised the question of how the Centre can make up for states’ GST collection shortfall when its own fiscal health is under pressure.

State governments have been suggesting that the Central government could borrow from the market any additional fund requirement for compensating states and extend the cess beyond 2022, when the compensation requirement ceases to exist. The funds thus collected by way of GST cess beyond 2022 could be used to repay the debt raised for compensating states, according to states.

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