06 Feb GST Compensation to States
States Demand for extension of GST Compensation to States
Relevance for Prelims: GST Compensation to States, Working of GST Compensation
Relevance for Mains: Relevance and Need of GST Compensation
About Goods and Service Tax
Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. GST replaced several indirect taxes imposed by the central and state governments, making it a single unified tax system. One of the key features of GST is the sharing of revenue between the central and state governments.
GST Compensation to States
GST compensation to states refers to the reimbursement of losses incurred by the states due to the implementation of GST. According to the GST Act, the central government is obligated to compensate the states for any revenue loss incurred due to the introduction of GST for a period of five years from the date of its implementation. The compensation is calculated based on the revenue of the states in the base year of 2015-16, and a growth rate of 14% has been assumed.
The GST compensation mechanism is an important aspect of the Indian economy as it ensures the financial stability of the states and helps them to meet their developmental needs. The compensation is crucial for the states as it helps to make up for the revenue losses, they incurred due to the GST implementation. The compensation also ensures that the states are able to continue with their existing developmental activities without any financial constraints.
Collection and Distribution of GST Compensation Cess
The GST compensation collected by the central government is done through the GST compensation cess, which is levied on certain luxury and demerit goods, such as cigarettes, aerated drinks, and SUVs. The GST compensation cess is collected by the central government and is used to compensate the states for their revenue loss due to GST implementation.
The central government also transfers a portion of the Integrated GST (IGST) collected on the inter-state supply of goods and services to the states. The IGST revenue is divided between the central and state governments in the ratio of 50:50. The central government also transfers a portion of the Central GST (CGST) and State GST (SGST) collected on intrastate supply of goods and services to the states.
The central government also transfers the unutilized balance of the compensation fund to the states on a quarterly basis. The GST compensation fund is created to meet the compensation requirements of the states. The central government transfers the balance of the fund to the states after accounting for the compensation paid to the states during the quarter.
Challenges and concerns associated with it
However, the central government has been facing challenges in providing GST compensation to the states due to the low collection of GST revenue. The COVID-19 pandemic has further compounded the problem, leading to a sharp decline in GST collections. As a result, the central government has been struggling to pay the compensation to the states on time, leading to a liquidity crunch for the states.
To address this issue, the central government has proposed several measures, including borrowing options and the creation of a special borrowing window. The borrowing options include borrowing by the central government on behalf of the states, or by the states themselves, with the central government providing a guarantee. The special borrowing window is an alternative financing mechanism that allows the states to borrow from the market to meet their GST compensation needs.
The proposed measures have faced criticism from several quarters, with some experts arguing that the borrowing options will increase the debt burden of the states and the central government. Some have also argued that the borrowing options may not provide adequate compensation to the states, leading to a further decline in their financial stability.
In conclusion, the GST compensation to states is a critical aspect of the Indian economy and is crucial for ensuring the financial stability of the states. The COVID-19 pandemic has led to a decline in GST collections, making it difficult for the central government to compensate the states on time. While the proposed measures may provide some relief to the states, they also have their own set of challenges and limitations. It is important for the government to find a sustainable solution to the issue of compensation to the states, keeping in mind the long-term interests of the Indian economy.
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