Current Affairs

Issue

States are demanding that the GST compensation mechanism to be extended by five more years.

 

Background

The compensation mechanism was a unique feature that remained up to five years from the date of implementation of GST.

 

Details

• States have been demanding that the compensation mechanism be extended for some more time as their revenues have taken a hit due to Covid-19.

• The expenses of the state have gone up and they expect higher deficit as revenue growth is low. 

 

The compensation

• The nation-wide GST was levied based on the Constitution (One Hundred and First Amendment) Act, 2016.

• The GST compensation was the mechanism to suitably compensate states for loss of revenue arising out of implementation of the GST. It would be applicable for a period of five years.

• It was believed the states would endure a revenue shortfall if they gave up their rights to impose local-level indirect taxes.

• Even though the GST contained provisions for giving the SGST (State GST) component of the GST, and a share of the IGST (Integrated GST) to the states, revenue shortfall was expected.

 

Funding of compensation

• The funds for GST compensation were raised through a compensation cess levied on so-called ‘demerit’ goods.

• This includes goods such as pan masala, tobacco, aerated waters and motor cars apart from coal.

 

Calculating shortfall

• The shortfall was calculated based on a mechanism given in Section 7 of the GST (Compensation to States) Act, 2017.

• It is assumed based on 14% compounded growth from the base year’s (2015-2016) revenue and calculating the difference between that figure and the actual GST collections in that year.