Centre Releases GST Compensation Cess Of Rs 21,000 Crore To States
A customer holds Indian rupee notes at a store in the Dadar wholesale flower market in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)  

Centre Releases GST Compensation Cess Of Rs 21,000 Crore To States

The central government has released Rs 21,000 crore as goods and services tax compensation to states this week, two people familiar with the matter told BloombergQuint on condition of anonymity.

This is the first such transfer in the current year against compensation dues of previous years and the April-May FY22 period, to be paid out of compensation cess collections.

The government has released this amount proportionally to the states from the cess collections, one of the people cited earlier said. The transfer, the person said, was decided upon after seeing tax collections for April.

Following the payout, there is less than Rs 1,000 crore in the compensation cess fund as of now, this person said.

Given the limited availability of funds in the compensation cess kitty, there is no timeline on further release of dues, said the person, adding that the latest transfer helps reduce arrears from previous years.

Till FY20, the government would typically release the compensation amount to states once every two months.

We aren’t attaching the release of GST compensation cess to a particular period anymore, the person cited earlier said.

An email sent to the Finance Ministry on Thursday remained unanswered.

The GST Constitutional amendment assured states of compensation for loss of revenue for five years (2017-2022), as state levies were subsumed under the common national tax. A subsequent law mandated a 14% compounded growth in states’ GST revenue every year till 2022. A cess was imposed on sin goods to fund this revenue assurance.

At a GST Council meeting on May 28, the central government has proposed to borrow Rs 1.58 lakh crore to fund the shortfall in cess collections for FY22.

The government has projected the compensation required for the current year at Rs 2.7 lakh crore, assuming nominal GDP growth of 7% for 2021-22 . Of this, about Rs 1-1.1 lakh crore will likely be collected through the cess imposed, according to the proposal. The remaining Rs 1.58 lakh crore, will be funded through borrowings by states via the federal government.

A decision on the matter is yet to be taken.

This is the second year in a row that the government has faced a shortfall in compensation cess collections. A mechanism devised last year involves the central government borrowing from the markets and then passing on funds to states as loans. These borrowings are to be repaid from compensation cess collections in future years.

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