ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Crisis of GST Compensation Payment

Shrinking fiscal space in a decelerating economy is the novel threat to GST revenue compensation.


Revenue uncertainty associated with any tax reform is a major cause for concern for all governments and, therefore, some assurance of revenue protection is always needed to achieve a broad-based consensus in favour of such reforms. Likewise, the Goods and Services Tax (GST) (Compensation to States) Act, 2017 was envisaged to assure revenue protection to the states on account of any shortfall in the state GST (SGST) collection, including the integrated GST (IGST) settlement, during the first five years of the introduction of the GST. Further, resting on the back of this idea of “revenue protection” enshrined in the act, the GST Council has been experimenting with the design, structure, and administrative provisions of the GST to facilitate the ease of tax compliance and moderate its impact on the economy in the main. But, when there is a shortfall in the overall GST collection—more importantly, a rising revenue gap between the GST compensation requirement and GST compensation cess (GSTCC) mobilisation—making the (timely) release of GST compensation to states a matter of contention between the centre and states, the efficacy of the GST Compensation Act for lubricating the revenue compensation mechanism in this country is questionable.

The projection of SGST revenue has been based on an annual growth rate of 14% of the net collection of taxes subsumed under the GST in 2015–16. Simultaneously, to provide GST compensation to the states till 30 June 2022, the GSTCC has been introduced along with the GST, for items like pan masala, tobacco and tobacco products, aerated water, and passenger cars, since 1 July 2017, in order to mobilise additional resources for the GST compensation fund. Yet, the GST compensation payments to states have been characteristically delayed. For instance, a compensation of₹17,789 crore released in July 2019 was for the months of April and May 2019,₹27,955 crore for the months of June and July 2019 was made in August 2019, while the last release of₹35,298 crore in the middle of December 2019 is (likely) for the months of August and September 2019.

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Updated On : 6th Jan, 2020
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