In order to recoup payment for GST dues, the finance ministry has given an extension of nearly 4 years for the levy of GST compensation cess, till March 31, 2026.
The Ministry of Finance has announced an extension of the levy and collection of compensation cess under the indirect tax regime until March 2026. The notification came days before the Goods and Services Tax (GST) Council meeting, which is to be held on June 28-29. The GST Council previously approved the repayment of loans intended to compensate states for the five years since the July 2017 rollout. This extension of the cess levy is in line with that permission. It does not extend compensation to states beyond June 2022.
Last year, in September, the GST Council settled to continue the compensating cess fee in place only for loan repayments made beyond June 2022. Union Minister for Finance Nirmala Sitharaman had stated while briefing the media after the 45th GST Council meeting in September 2021 that this compensation to states ends after five years. July 2022 marks the end of the five-year period. As determined at the 43rd Council meeting, the cess that we are collecting beyond July 2022 will be used to pay back the loan. That starts in July 2022 and continues through March 2026-exclusively for paying the loan given to states since last year.
Payout of GST compensation
States were guaranteed compensation under GST at the compounded rate of 14 per cent from the base year 2015-16 for losses brought on by the adoption of the taxation regime for the five years since its rollout. June marks the conclusion of the compensation system.
“This is just to enable repayment of loan and pending compensation dues pertaining to the period of five years. This extension is to pay the remaining compensation pertaining to that five-year period, which includes the loan,” a senior finance ministry official said.
States have been calling for an extension of the GST compensation scheme. It is anticipated that they would do so once more at the forthcoming conference.
According to calculations made in relation to compensation that will be presented at the Council meeting next week, states have received a total of Rs 89,783 crore this fiscal year, leaving the compensation cess fund with a negative balance of Rs 59,801 crore. According to information on revenue growth gathered for the Council meeting, the average all-India deficit between the protected revenue and the post settlement gross State GST (SGST) revenue was 27.2% in 2021–2022 compared to 37.9% in 2020–2021.
In the year 2021-22, only five out of the 31 states/ UTs recorded a higher growth rate of revenue than the protected rate of revenue for the states under GST. These were Arunachal Pradesh, Manipur, Mizoram, Nagaland, Sikkim. On the other hand, some states have registered the highest revenue gap between protected revenue and post-settlement gross state GST revenue in FY22. These include Puducherry, Punjab, Uttarakhand, Himachal Pradesh and Chhattisgarh.
The Center released Rs 86,912 crore to the states in May, clearing the whole GST compensation owed up to that point. A total of Rs 25,000 crore of this amount was released from the GST compensation fund, and the remaining balance of Rs 61,912 crore was released by the Center from its own funds pending collection of cess.
Slowdown in revenue growth
In recent years, the states’ protected revenue rose at a slower rate than the guaranteed 14% compounded growth. The COVID-19 further widened the difference between protected revenue and the actual revenue receipts, including a depletion in cess collection. The Center has borrowed and disbursed Rs 1.1 lakh crore in 2020–21 and Rs 1.59 lakh crore in 2021–22 as back-to-back loans to pay for a portion of the shortfall in cess collection in order to fill the resource gap of the states caused by the short release of compensation.
Of the total compensation issued in May, Rs. 17,973 crore went toward payments due in April and May; Rs. 21,322 crore went toward payments due in February and March; and Rs. 47,617 crore represented the remaining compensation that must be paid up to January 2022. In the fiscal years 2021–2022, the Center repaid an interest expense of Rs 7,500 crore, and in this fiscal year, Rs 14,000 crore is due. Principal repayment will begin in the upcoming fiscal year and last through March 2026.
