Ahead of the Goods and Services Tax (GST) Council meeting next week, the Centre on Thursday released compensation worth Rs 36,400 crore to states for three months up to February 2020.
The much-delayed compensation comes at a time when state 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 between December 2019 and February 2020 on Thursday,” the Ministry of Finance said in a release.
The GST compensation of Rs 1.15 trillion for April-November 2019 was released earlier, the government said. This stands against Rs 95,551 crore collected as cess in the compensation fund in 2019-20 (FY20).
The compensation mechanism to states under GST has come under strain due to inadequate cess collection amid 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 five years of GST implementation.
States have been up in arms with the Centre over non-payment of compensation dues, while the Union government has conveyed its inability on account of cess shortfall.
Besides dwindling cess collection in the compensation fund, the rising dependency of states on the promised GST compensation amid sharp fall in revenue due to the Covid-19 pandemic has compounded the challenge.
In FY20, the Centre used Rs 47,271-crore surplus cess from 2017-18 and 2018-19.
The compensation cess is levied on luxury and sin items such as aerated drinks, coal, paan 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 20,250 crore in 2020-21, against Rs 13,750 crore last year.
Under the GST structure, taxes are levied under 5, 12, 18, and 28 per cent slabs.
The GST Council in its meeting held in March deliberated on whether it could go for borrowing if the compensation cess collections fall short of the requirement of states. It will seek opinion on various legal issues – who will give guarantee to the borrowing, how will it be repaid, how interest is to be paid, impact on the fiscal responsibility and budget management Act, etc.