Govt ‘In No Position’ To Pay GST Dues To State; Can Rework The Formula Due To Dip In Tax Revenues

In a meeting held on Tuesday, the Union Finance Secretary Ajay Bhushan Pandey told the Parliamentary Standing Committee on Finance that the government (Centre) is not in a position to pay out GST compensation to the States, in accordance to the present revenue sharing formula.

The report, brought out by The Hindu, informed that this Parliamentary Standing Committee on Finance was headed by BJP MP Jayant Sinha.

The reason for this inefficiency to pay the compensation amount to the States is a steep fall in tax collections due to the COVID-19 pandemic and adjoining lockdown.

Before giving you a detailed insight on what all conspired and resulted in the meeting held on Tuesday, we would like to first bring you on the same page, by speaking a bit on what these GST collection are, in the first place.

GST Collections

As per the Goods and Services Tax (GST) law, the states were promised to be paid for any loss of revenue in the first five years of the GST implementation, w.e.f. July 1, 2017.

Under the GST structure, taxes are levied under 5%, 12%, 18% and 28% slabs.

Now, let’s speak of ‘compensation cess’.

A compensation cess is levied on imported goods to make up for the loss of revenue on account of GST implementation.

In case of any shortfalls, adjustments are to be made from this cess.

However, this time, whatever collections the Centre has raised through the compensation cess, it is not expected to be sufficient to balance out the shortfall of state revenues.

The latest round of funds released by the government informed that the compensation cess collections dropped by 42%, and were made up by using balance of cess from previous years, along with a transfer from the Consolidated Fund of India.

What is Known from the Meeting?

Now that you know what the compensation cess is all about and how to proceed with it, we will get back to what happened in the meeting held on Tuesday.

Finance Secretary Pandey commented about this statement in response to a question asked on ‘revenue shortfall due to the pandemic’.

When asked about how the government plans on working towards the commitment to the States, Pandey responded that the GST Act has provisions to rework the formula for paying compensation to the State governments if the revenue collection drops below a certain threshold.

Additional Important Points

The meeting took place a day after the Centre released the GST amount of Rs 13,806 crore to states for the financial year 2019-20.

It has released a total amount of Rs 1.65 lakh crore for 2019-20, while the amount of cess collected during the year was Rs 95,444 crore.

The GST Council was scheduled to meet in July to work out the formula to work upon the compensation to the States. However, the meeting has not been convened so far.

The meeting was convened to discuss the ‘Financing the Innovation Ecosystem and India’s growth companies’, when opposition members reportedly demanded that the issue of state’s GST compensation be discussed.