Context

Even after continuous meetings, the Goods and Services Tax (GST) Council in its recent meeting failed to reach a consensus on borrowing options in lieu of the compensation cess shortfall.

About

• What is the compensation issue?

• • The Indian economy was in a slowdown even before the COVID-19 pandemic hit India. This was reflected in the weak economic indicators and a slowing GST collection.
  • In October, payments to states were delayed as the collection was lower than expected.
  • Under GST law, states were guaranteed to receive payment for any loss of revenue in the first five years of the GST implementation, from July 1, 2017.
    • States have been promised compensation for any revenue shortfall till 2022, in case they go below the 14 percent annual growth since the GST rollout in 2017.
  • The amount due to states started rising at a compounded rate of 14 percent, despite compensation collections not showing any major upward movement for two consecutive years.
  • For the April-June period, Rs 14,675 crore has been collected as compensation cess, of which Rs 7,665 crore was collected in June.
  • The Centre cleared Rs 36,400 crore for the November-February period in June.
  • In July, the Centre released Rs 1.65 lakh crores as GST compensation to states/Union Territories for the financial year 2019-20, against cess collection of Rs 95,444 crores.
    

Goods & Services Tax Goods & Services Tax Council is a constitutional body for making recommendations to the Union and State Government on issues related to Goods and Service Tax. As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A. As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members: - Chairperson: the Union Finance Minister- Chairperson Member: the Union Minister of State in charge of Revenue or Finance- Member Members: the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government

Why is it important?

• With States depending heavily on funds from the Centre to meet their public expenditure, any impediments in the flow of funds from Centre will impact the quality of services provided by State government.
• If the GST Council decides to increase the rates of compensation cess or stretch the period for which States are compensated, this may mean that goods taxed at the highest GST rate of 28 per cent will continue to pinch people’s pocket.
• Select vehicles, tobacco and aerated drinks, apart from coal, are levied a compensation cess.