The West Bengal CM has said that slashing State levies on petrol and diesel will be possible only if the Centre clears its outstanding dues of over ₹97,000 crore, which includes compensation for implementing the Goods and Services Tax (GST).

What is GST?

• 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).
• GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

Compensation under GST regime

• 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.

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.

Significance of GST compensation

• 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.

What is the status of the outstanding GST compensation due to the States?

• The Finance Ministry said that outstanding GST compensation dues to States for 2021-22 stood at ₹78,704 crore.
• This means that dues have been remitted to States for the eight-month period of April 2021 till November 2021.
• Normally, compensation for 10 months from April-January of any financial year is released during that year and the compensation for February-March is released only in the next financial year.
• The pending amount will also be released as and when the amount from cess accrues in the compensation fund.

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[Burning Issue] GST Compensation

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