Many states have demanded that the GST compensation cess regime be extended for another five years and the share of the Union government in the centrally-sponsored schemes be raised as the COVID-19 pandemic has impacted their revenues.

 What is GST?

• GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
• GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
• It is charged at the time of supply and depends on the destination of consumption.
• For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

Compensation under GST regime: 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.
• Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

Why is the compensation necessary?

• States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
• GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
• Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

Distributing GST compensation

• The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
• The compensation fund so collected is released to the states every 2 months.
• Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

Try this question from CSP 2018:

Q. Consider the following items:

1. Cereal grains hulled
2. Chicken eggs cooked
3. Fish processed and canned
4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

 

Post your answers here.

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[Burning Issue] GST Compensation

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