Ahead of the GST Council meeting next week, the Centre on Thursday released compensation amounting to Rs 36400 crore to states for three months up to February, 2020. The much delayed compensation comes at a time when states’ finances are under severe stress due to the Covid-19 lockdown.
“Taking stock of the current situation due to Covid-19 where state governments need to undertake expenditure while their resources are adversely hit, the Central Government has released the GST compensation…for the period from December, 2019 to February, 2020 today,” the finance ministry said in a release.
The GST Compensation of Rs 1,15,096 crore for period April-November, 2019 was released earlier, the government said. This was against Rs 95,551 crore collected as cess in the compensation fund in 2019-20.
The mechanism under which compensation is paid to states under GST has come under strain due to inadequate cess collection amid a bleak consumer demand. Under the law, if states’ GST revenue does not grow by at least 14 per cent over the base year of 2014-15, the Centre pays them the difference, on a bi-monthly basis, for the first 5 years of GST implementation.
States have been up in arms against the Centre over the non-payment of compensation dues according to the calender, while the Union government has conveyed its inability to do so on account of cess shortfall. Besides dwindling cess collection in the compensation fund, rising dependency of states on the promised GST compensation amid a sharp fall in revenue due to the coronavirus pandemic has added to the challenge.
In 2019-20, the Centre used the Rs 47,271 crore surplus cess from 2017-18 and 2018-19.
Compensation cess is levied on luxury and sin items such as aerated drinks, coal, pan masala, cigarettes and automobiles over the peak rate of 28 per cent.
The government is exploring a slew of options, including borrowing from the market and extending the cess period further to repay.
The monthly GST compensation requirement is estimated at Rs 20250 crore in 2020-21 as against Rs 13750 crore last year.
Under the GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs.
The GST Council, in the last meeting held in March, deliberated on whether it could go for borrowing if compensation cess collections fall short of the requirement of the states. It will seek opinion on various legal issues such as who will guarantee the borrowing, how will it be repaid, how interest is to be paid, impact on the fiscal responsibility and budget management Act, etc.