The Centre has decided not to extend compensation to states for losses in revenue due to the implementation of GST by another five years. Instead, the Centre has clarified that it would continue to levy the Compensation Cess till March 2026 to repay the money borrowed for compensating the states till July 2022.
It was the demand of the states to extend the compensation given to them under GST by another five years.
The government said in a statement that a presentation was made to the Council wherein it was brought out that the revenue collections from Compensation Cess in the period beyond June 2022 till April 2026 would be exhausted in repayment of borrowings and debt servicing made to bridge the gap in 2020-21 and 2021-22.
On seeking clarification if this means no extension of compensation to states, the finance minister only said that the GST Act provides for compensation only till 2022.
This would be a big setback for states which have not been able to find alternative ways of increasing their GST collections as the cover of protected 14% revenue growth every year would be removed.
“With four years of experience under the GST regime, this is an opportune time to review the costs and benefits of introducing GST from the States’ perspective. The promise of higher GDP growth due to the introduction of GST and consequent growth in taxation revenues have remained elusive, even factoring out the overall devastation of the COVID pandemic,” says Tamil Nadu finance minister P Thiagarajan.
TS Singhdeo, the commercial tax minister of Chhattisgarh, said that the five-year period for compensating the states was decided on the basis that high economic growth would ensure states make good of the losses in five years.
“However, even before the pandemic hit, the economy was already decelerating making it difficult for states to increase their GST revenue,” he said.
On what recourse the states have on the issue, Singhdeo said that the GST Act is such that even if all the states come together, if Centre does not agree, nothing can be done.