Centre clears entire GST compensation due till May by tapping own funds

To ease liquidity of states, the Centre on Tuesday released Rs 86,912 crore or the entire amount of goods and service tax (GST) compensation payable to states up to May, by tapping own resources.

The move to release the compensation amount upfront instead waiting for the usual bi-monthly transfer of compensation amount also assumes importance ahead of the GST Council meeting later this month. The Centre will have to release GST compensation to states for June, the last month of the five-year mechanism.

Under the GST compensation mechanism, which is constitutionally-guaranteed, state governments are assured 14% annual revenue growth for the first five years after the tax’s July 2017 launch.

“This decision (release of compensation till May) has been taken despite the fact that only about Rs 25,000 crore is available in the GST Compensation Fund. The balance is being released by the Centre from its own resources pending collection of cess,” the finance ministry said in a statement.

Of the Rs 86,912 crore released to states, Rs 47,617 crore was compensation arrears up to January 2022, Rs 21,322 crore for February-March and Rs 17,973 crore for April-May. Had the Centre followed the usual pattern of bi-monthly release, the compensation releases would have dragged on at least till August.

For providing compensation to states, cess is being levied on certain goods and compensation is being paid out of the Compensation Fund since July 1, 2017.

To ensure that states have adequate and timely resources to combat covid and related issues, Centre borrowed Rs 1.1 trillion in FY21 and Rs 1.59 trillion in FY22 and passed it on to States on a back-to-back loan basis as funds in the designated cess pool fell short.

Helped by robust tax revenue receipts, capital expenditure by state governments seems to have jumped by almost a third on year in FY22, a review of the budgetary performance of 20 states by FE showed.

With the concerted efforts by centre and states, gross monthly GST collection including cess has been showing a remarkable increase in recent months. However, the Centre has made it clear that it will not extend the compensation period beyond June 2022 even as some states have pressed for such an extension citing revenue constraints in the aftermath of Covid. The GST Council may discuss the matter.