GST Compensation Cess: Why centre hasn’t paid yet?

101th amendment act which brought a lot of questions, Goods and Service Tax(GST) is an amendment that took over 7 years to come as an amendment in our Constitution of India, First introduced in 2010 under the leadership of former Prime Minister Dr Manmohan Singh. Since 2000 the government stated the idea of designing GST and set up a committee to design a GST model.

Well, GST was going to affect financial stability in our country, States were not sure in their position whether they should welcome GST or reject it as it was against the fiscal autonomy of States. Obviously, the need for GST was there but the main question was of implementation. The government cannot just pass it as all sectors have to make changes in their business models, the states were not ready to give up their taxation powers, there were a lot of taxes that were charged by both centre and state like Value added tax(VAT), Central sales tax, central excise duty, purchase tax, entertainment tax, etc. Here the VAT was collected by state and different states had their own rules and regulations regarding the collection of VAT.

The opposition opposed the implementation of GST, even the BJP (Bhartiya Janta Party) that implemented GST later in 2017 were strongly opposing the implementation of GST. They were against the implementation of GST that gives the centre the veto power on the state's taxation powers and states would be at mercy of centre in levying taxes.

Before GST there was a lot of overlapping of taxes while centre and state both enjoyed the tax, Citizen of India had to face the real problem as they had to gave double tax. For example, when goods were manufactured and sold, excise duty was charged by the centre. Over the above the excise duty, VAT was also charged by the state. It led to a ‘tax on tax’ effect, also known as the cascading effect of taxes. Whereas GST is a single tax and the input tax credit process will be more accurate and transparent, as electronic matching will be performed

After, change of government Modi Sarkar introduced GST again in parliament, and critics asked him that you opposed GST when you were in the opposition to which he replied as I quote “The issues that I raised as a CM (Chief Minister), I have worked on them as a PM (Prime Minister)”. The government said that on implementing such a reforming bill major manufacturing states' issues have to be taken into consideration and should not disturb their working.

GST compensation cess was levied by the government as compensation to loss of collected revenue by states arising due to the implementation of GST. This worked as an assurance to states that working of states won’t be affected after implementation of GST and This cess will not be payable by exporters and those persons who have opted for compensation levy. The input tax credit of this cess can be only used to pay compensation cess and not the other taxes like CGST, SGCT, or IGST. It was agreed that such shortfalls would be made good through the GST compensation fund for a period of Five Years that is set to end in 2022.

On 18 September 2020, current Finance Minister Nirmala Sitharaman said that centre from the projected shortfall of about 2.35 lakh crore, only 97000 crore is the deficit amount arising out of GST implementation while the remaining 1.38 lakh crore was attributed to “Act of God” as that was aroused due to Covid-19 Pandemic and It is independent of the implementation of the new tax regime. The opposition showed great critics they stated data and asked the centre the decline in annual growth rate in GDP from 8% in Fiscal Year 2015 to first Qtr 2020s 3.1%(term period of BJP led Government) is also an act of God?

At the 41st GST Counsel discussion was held to provide measures to meet the compensation requirements to continue to pay off states. The centre provided states with two options and asked the states that they have 7 days to reply to the centre’s proposal.

Option 1: Under this, the shortfall amount owing to GST implementation stands at 97,000 crores. The states can borrow via RBI special window. “Centre will act as a facilitator between states and the RBI and make sure all the states get to borrow at the same rate without any discrimination,” Nirmala Sitharaman said commenting on the help that will be provided to states.

Option 2: It states the borrowing of 2.35 lakh crore rupees. Under this full GST compensation shortfall FY 21, shortfall due to pandemic as well as GST implementation. Under this option, states can borrow from the market, which will be facilitated by Centre & RBI. Relaxation of 0.5% in states’ borrowing limit under FRMB act.

20 States opted for option 1 that states could borrow ₹97000 crores which was later increased to 1.1 lakh crore through a special window and the principal and interest are to be paid out of the compensation cess. Those states will also be permitted to borrow the final instalment of 0.5 per cent of their GSDP out of the 2 per cent additional borrowing permitted by the Union Government because of the Covid-19 pandemic, waiving the reforms condition. This means that States can borrow up to 4 per cent of their GSDP during the current fiscal without meeting any of the conditions also states which adopted option 1 have become eligible to raise the additional amount from the open market.

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