Saturday, May 30, 2020

GST compensation: The cess story unfolds

According to a previous releases from the Finance Ministry, in the FY 2017-18 a total GST compensation cess of Rs 62,611 crore was collected, out of which a sum of Rs 41,146 crore was released to the States/UTs as GST compensation.

New Delhi: In the current fiscal year 2020-21, the central government has released Rs 15,340 crore to the states and Union Territories as GST compensation despite an almost insignificant collection practically due to relief provided in terms of filing of return and payment of taxes owing to lockdown caused by the outbreak of COVID-19 pandemic.

According to government sources, earlier in the previous FY 2019-20, the central government had released Rs 120,498 crore GST compensation to the states and UTs while it had collected only about Rs 95,000 crore in the form of compensation cess.

According to a previous releases from the Finance Ministry, in the FY 2017-18 a total GST compensation cess of Rs 62,611 crore was collected, out of which a sum of Rs 41,146 crore was released to the States/UTs as GST compensation.

After that, in the FY 2018-19, Rs 95,081 crore were collected as GST compensation cess out of which Rs 69,275 crore were released to the States and UTs as GST compensation. As per the releases of the finance ministry, as on March 31, 2019 an amount of Rs 47,271 crore GST compensation cess collected had remained unutilized after the release of GST compensation to the States and UTs in the FYs 2017-18 and 2018-19.

Since the end of August 2019, the central government has started realising the impending precarious position in paying GST compensation to the States and UTs as the compensation cess requirement was being double of the average monthly cess collection.

On an average the monthly GST compensation cess requirement was to the tune of Rs 14,000 crore while the cess collection average was only in the range of Rs 7000 to Rs 8000 crore per month.

Therefore, only options left with the GST Council were to either bring more items under the cess base by expanding the base of GST cess items or to increase cess rate on the existing items. Any increase in compensation cess on few items could only yield about Rs 2000-3000 crore a year.

Therefore, the other options left were to either forego full cess compensation which was increasing @14 per cent per annum or to go ahead with whatever compensation is available. One more option was to raise the tax rate on items by rationalisation of rates by shuffling slab rates.

Government sources said that since the last release of GST compensation cess to the States and UTs made in Feb 2020 of Rs 19950 crore for the months of October and November 2019, the Centre has released a total of Rs 120,498 crore in the FY 2019-20.

Thereby, compensation till the bimonthly period of October-November, 2019 has been paid for all states and no state has been paid compensation for any period beyond that without any discrimination between states.

Sources claimed that even when short-releases of compensation have been made in the past; it is done on a pro-rata basis uniformly for all states without discriminating among them. The calculation of compensation is done in complete transparent manner and is shared with the states. The overall picture about compensation paid and payable is presented before the Council with full facts.

However, payment of GST compensation cess became an arguable point of discussion among the centre and the states. Every participant of the GST Council wanted to find a solution to this problem in full earnest as it was a matter of serious concern for everyone to have full share of the cake when eventually you have only the half to share.

Here it must be noted that GST compensation for loss of revenue to states due to introduction of GST is paid as per the provisions of the Goods and Services Tax (Compensation to States) Act, 2017.

The Act provides that the gap between the protected revenue and the GST revenue actually collected shall be paid to States as compensation. The protected revenue is calculated at 14 per cent growth per annum on the base year figure of 2015-16 of the taxes subsumed in GST.

For the purpose of payment of compensation, the Parliament, on the recommendations of the GST Council, has authorised levy of a Compensation Cess which is credited to the Compensation Fund. Section 8 (1) of the Act provides for levy of Cess and section 10 (1) of the Act states that the amount collected from the cess shall be credited to a Compensation Fund.

Section 7 of the Act provides that the compensation shall be paid for every bi-monthly period for the transition period of five years but section 10 (2) clearly states that all compensation to states shall be paid from the Fund.

Some suggestions for payment of compensation cess from the Consolidated Fund of India or through borrowings from the market were floated at the GST Council but here it would be pertinent to recall that the issue of a possible situation where the cess falls short of compensation requirement has been discussed in various meetings of the Council.

In Seventh meeting of the GST Council held on 22-23 December 2016, the erstwhile Finance Minister and the then Chairman of the GST Council, Shri Arun Jaitley noted that, “…the demand for payment of compensation from the Consolidated Fund of India essentially meant funding compensation from Income Tax or non-tax revenues of the Central Government, which would be a challenge as the Central Government also had its own committed expenditure.” He said that “…based on these considerations, certain principles had been agreed upon, namely that the compensation would be funded out of the cess mechanism, which would have a pool of revenue and if there was any shortfall in this pool, it could be supplemented by some mechanism that the Council might decide”.

On a point raised by the then Finance Minister from Telangana that “the Council had not decided as to how compensation would be paid if there was a shortfall in cess collection”, the then Chairperson had stated that “in such an eventuality, the Council could decide to raise the rate of tax or cess”.

In response to the remark of erstwhile Tamil Nadu Minister that, “cess should not become a cross around the Council’s neck” and his suggestion “to have a formulation if cess was found to be inadequate, the Council shall arrive at ways to meet the shortfall”, the then Chairperson observed that “there was Constitutional commitment for the Central Government to provide hundred per cent compensation and how it would be done was for the Council to decide”.

During the eighth meeting of the Council, on a point raised by the then Finance Minister from Karnataka that “the understanding should be that if the amount for compensation was inadequate in the GST Compensation Fund, then cess could be collected in the sixth year or subsequent year to adjust the payment”, the then Chairperson assured that “compensation to States shall be paid for 5 years in full within the stipulated period of 5 years and, in case the amount in the GST Compensation Fund fell short of the compensation payable in any bimonthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years”.

Government Sources said that these discussion very clearly outline the decisions taken in the Council and have been enshrined in the Compensation Act in the form of Sections 7, 8 and 10 of the Act which essentially says that compensation cess shall be levied, collected and credited to the compensation fund and compensation shall be paid on bimonthly basis from that fund.

The law also provides that such other amounts as may be recommended by the Council shall be credited to the Fund to provide for the decision of the Council that if the amount of cess falls short of the compensation requirement, GST Council shall decide the mode of raising additional resources.

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