GST compensation cess may be extended beyond 5 yrs

New Delhi: Faced with a sharp decline in GST collections due lockdown and disruptions in economic activities across the country, the central government is looking at paying GST compensation to States using a portion of its borrowings and repaying it by collecting cess in the sixth or further subsequent years.

Under the GST law, States are guaranteed full compensation for any revenue loss for the first five years after the introduction of the goods and services tax (GST) in July 2017. The compensation is a gap between actual revenue collected and projected revenue. The projected revenue is revenue growth of 14 per cent for States per year over base year 2015-16.

As per the GST Act, full compensation to the States has to be paid for a period of five years till FY22 only through the compensation fund that gets its funds through a levy of GST compensation cess on few items. However, with funds not getting enough collections since August 2019, the GST compensation to States have been delayed with Centre now looking at getting the GST Council nod for extending the levy of compensation cess at least a couple of years beyond the cut-off fifth year to make good the gap in cess collection actual compensation payment to states.

"This (extending the duration of GST compensation cess) has been discussed in the past to ensure States are paid full compensation for any loss of revenue in first five years of the implementation of the new indirect tax regime while the Centre repays its liabilities through cess collections in subsequent years. The GST Council may explore the option again at its next meeting," government sources privy to the development said.

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 a collection of cess in the sixth year or further subsequent years, sources added.

The situation on GST revenue has worsened in the month of April, with several states indicating a shortfall in collections to the tune 80-90 per cent of average monthly collections during this time of the year. In fact, Delhi has said its GST collections may end up at a mere Rs 300 crore in April against a collection of Rs 3,500 crore in the same month previous year. Other states like Tamil Nadu, Assam, West Bengal, Andhra Pradesh also facing severe revenue decline due to shrinking economic activities during the Covid-19 induced lockdown.

With economic activity and GDP growth projected to remain subdued for the most part of FY21, the Centre is looking at all possible means, how it could meet its constitutional obligation of compensating the states for their revenue loss.

After February, when Centre released GST compensation of Rs 19,950 crore for the months of October and November, 2019, it is only now that the government has released Rs 15,340 crore despite insignificant tax collections.

The monthly compensation requirement for States in 2020-21 is being pegged at Rs 20,250 crore, government sources said leaving a big gap between what needs to be paid and what is being collected.