Ahead of the end of the five-year goods and services tax (GST) shortfall compensation to states on June 30, the Centre has extended the ‘compensation cess’ till March 31, 2026.
The extension, which was earlier approved by the GST Council, is necessary to repay the principal and service the interest cost of the loans taken in FY21 and FY22 to compensate states for the shortfall in guaranteed GST revenues.
The GST Compensation to States Act provides for the release of compensation against 14% year-on-year growth over revenues in 2015-16 from taxes subsumed in GST. This compensation cess is credited to the compensation fund and as per the Act, all compensation is paid out of the fund. Currently, the cess is levied on demerit items like pan masala, tobacco, coal and expensive cars.
The Centre has argued against extension of compensation to states beyond June 30, 2022, saying the cess proceeds between July 2022 and March 2026 will just suffice to service the loans. Many states are demanding extension of the compensation period by 2-3 years in view of the pandemic in the last two years, which have weakened their fiscal position. The matter will likely be discussed in the upcoming GST Council meeting on June 28-29 at Chandigarh.
The Centre has so far released a total of Rs 8.22 trillion to the states as GST compensation till May 31 2022, including Rs 1.6 trillion in FY22, even as the collections of cesses for this purpose fell way short of the target.
The Centre arranged back-to-back loans totalling Rs 2.6 trillion to bridge the shortfall in the cess pool in FY21 and FY22 under a special low-cost facility offered by the RBI.
“The extension of the levy of Compensation Cess, although expected, will continue to impose a burden on the relevant businesses, especially sectors like automobiles, which actually need to be encouraged as these have a multiplier effect on GDP and employment,” said MS Mani, Partner at Deloitte India.
Given the robust trends for April-May 2022, and the anticipation of sustained healthy momentum of activity, analysts expect CGST inflows in FY23 to overshoot the budget estimate by Rs 1.15 trillion. That would also mean about Rs 1.3 trillion in extra SGST receipts in aggregate to states, which will cease to receive GST compensation from July 2022. The Centre is expecting monthly gross GST (CGST and SGST) collections to average Rs 1.4-1.5 trillion in FY23 compared with Rs 1.2 trillion factored in the Budget.
Saurabh Agarwal, Tax Partner, EY India, said: “The current extension of GST cess cannot be said to be settling the issue of GST compensation between the Centre and states. If states resort to levy of special cess to augment their revenues it would distort the objective of GST, ie one nation one tax.”