If the compensation cess doesn’t bring in enough money, states may have to increase GST rates on some items.

States may not get full GST compensation amid shortfall in cess collection
Money gst Wednesday, February 12, 2020 - 14:52

GST compensation that was promised states earlier may not get released by the central government. Despite this being a bone of contention between several states and the centre, the finance ministry has reportedly said that the amount will be given only through money collected from the cess.

As per a Business Standard report, despite the centre carving out a special dispensation in the Union Budget, states might not get the full amount of their losses.

Central Board of Indirect Taxes and Customs Member John Joseph told the publication that states would get the compensations only if funds are available. Now with there not being enough collection happening through the cess, the law does not say that compensation can be given to states from central GST.

Joseph told BS thatsStates are free to increase the GST or cess rates to get full compensation.

To assuage the fears of the states before they agreed to GST rollout, the then Finance Minister Arun Jaitley had promised the states that whatever they lose out in terms of tax collections due to GST will be compensated for a period of five years from the actual rollout.

At the time, states agreed that there will be a separate fund pool created for this purpose, called the compensation cess. This pool will get funds from a cess collected from items like cigarettes, aerated drinks, pan masala etc. referred to as sin tax. These items already attract a high rate of 28% GST and this cess is over and above this. There is a legislation created which says the compensation to the states will be given only out of this pool fund and the regular revenues will not be touched for this.

Unfortunately, the centre and the states had not anticipated the slowdown in the economy and that has put everyone in difficulty. The compensation fund cess pool does not have the funds to enable the centre to pay to the states.  

The overall shortfall may be to the tune of Rs 30,000 crore. Actually, for the year, 2019-20, the shortfall in terms of the compensation to be paid to the sates is estimated at Rs 63,200 crore. Luckily, there is a carryover from the previous years of Rs 35,000 crore from the previous years in the cess fund which the government will transfer to the current year. This will still leave a gap of around Rs 28,000 crore.

There has been a shortfall to the extent of Rs 15,100 crore for 23 states as estimated till December 2019. Some of the states which faced reduced GST collections include Punjab’s and Andhra Pradesh by 16%, Uttar Pradesh by 11%, Kerala by 12%, Gujarat by 6% and Telangana by 8%. 

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