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The Impasse over GST Compensation

The GST council should arrive at a consensus to compensate the states for revenue shortfalls.

The economic slowdown aggravated by the onset of the COVID-19 pandemic and prolonged lockdowns had led to a significant contraction of the Indian economy, adversely affecting growth and revenue projections, including the goods and services tax (GST) collections. The issue of the payment of GST compensation, which is due to the states, had become contentious since August 2019. This was because of the recurring delays in compensation payments to states, flouting the stipulated norm that such compensation should be provisionally calculated and paid every two months. The states are legally entitled to the compensation for the revenue loss occurring due to the implementation of the GST for a period of five years (2017–22), as per the GST (Compensation to States) Act, 2017, from the GST Compensation Fund.

As the states had ceded their powers to levy indirect taxes that were subsumed under the GST to the centre, the former are legally entitled to the shortfalls in revenue caused by the transition to the new GST regime. The shortfall in revenue has been calculated by projecting a revenue based on 14% compounded growth from the base year’s (2015–16) revenue and computing the difference between that figure and the actual GST collections in that year. With the ensuing recession, at the end of the current financial year, the GST Compensation Fund is projected to face a shortfall of about ₹2.35 lakh crore. This is because the compensation fund is expected to accrue a cess and balance of only ₹65,000 crore, while the shortfall in revenue is estimated at ₹3 lakh crore.

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Updated On : 21st Sep, 2020


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