Extending the GST compensation

POLITY/ ECONOMY

• GS-2: Federalism and its challenges
• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Extending the GST compensation

Context: Just a day ahead of the 46th meeting of the GST Council on December 31, the Finance Ministers of several States had a pre-Budget interaction with the Union Finance Minister and demanded that the GST compensation scheme be extended beyond June 2022, when it is set to expire

What is the GST compensation?

• The Constitution (One Hundred and First Amendment) Act, 2016, was the law which created the mechanism for levying a common nationwide Goods and Services Tax (GST). 
• The adoption of GST was made possible by States ceding almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed into the GST. 
• While States would receive the SGST (State GST) component of the GST, and a share of the IGST (integrated GST), it was agreed that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years from 2017. 
• This corpus in turn is funded through a compensation cess that is levied on so-called ‘demerit’ goods. 
• The computation of the shortfall is done annually by projecting a revenue assumption based on 14% compounded growth from the base year’s (2015-2016) revenue and calculating the difference between that figure and the actual GST collections in that year.
• However, over the last five years, there had been a widening gap between the actual revenues realised and the protected revenues guaranteed. While the trend had been visible even before the pandemic, the gap had widened ever since.

What is the shortfall for the current fiscal year ending on March 31?

• After taking into account earlier releases amounting to ₹1,15,000 crore, the total amount released in the current financial year as back-to-back loan in-lieu of GST compensation was ₹1,59,000 crore, it added at the time. 
• The Centre clarified that this sum was in addition to normal GST compensation “being released every 2 months out of actual cess collections” that is estimated to exceed ₹1 lakh crore.
• The sum total of ₹2.59 lakh crore is expected to exceed the amount of GST compensation accruing in FY 2021-22, the Union Ministry of Finance said at the time.
• It also explained that the decision for the Union government to borrow the ₹1.59 lakh crore and release it to the States and UTs, which had been taken in the 43rd GST Council Meeting held on May 25, 2021, was aimed at bridging the resource gap.

Can the deadline be extended? If so, how?

• The deadline for GST compensation was set in the original legislation and so in order to extend it, the GST Council must first recommend it and the Union government must then move an amendment to the GST law allowing for a new date beyond the June 2022 deadline at which the GST compensation scheme will come to a close.
• Interestingly, even now the compensation cess will continue to be levied well beyond the current fiscal year since the borrowings made in lieu of the shortfalls in the compensation fund would need to be met. 
• In September, the GST Council decided to extend the compensation cess period till March 2026 “purely to repay the back-to-back loans taken between 2020-21 and 2021-22”.

Connecting the dots:

• Competitive and Cooperative Federalism
• 15th Finance Commission