GST Compensation

GST Compensation

Part of: Prelims and GS III – Cybersecurity 

Context The Ministry of Finance has released ₹44,000 crore to the States and UTs with Legislature under the back-to-back loan facility in lieu of GST Compensation.

Key takeaways 

• After taking into account earlier release of ₹1,15,000 crore, total amount released in the current financial year as back-to-back loan in-lieu of GST compensation is ₹1,59,000 crore.
• This release is in addition to normal GST compensation being released every 2 months out of actual cess collection.

Background 

• Subsequent to the 43rd GST Council Meeting held on 28th May 2021, it was decided that the Central Government would borrow ₹1.59 lakh crore and release it to States and UTs with Legislature on a back-to-back basis to meet the resource gap due to the short release of Compensation.

About GST Compensation

• Before GST, States had the power to levy some indirect taxes on economic activity. Therefore, after GST regime was introduced (in 2017), the Centre promised guaranteed compensation to the States for the first five years, for the revenues they lost after the shift from the earlier system. 
• The compensation is calculated at a growth rate of 14% keeping 2015-16 as the base year and by levying a Compensation Cess on Sin and luxury goods.