1.0 Brief Background
The GST compensation cess is levied under Section 8 of the GST (Compensation to States) Act, 2017 to compensate the States for any loss of revenue arising on account of implementation of GST for five years.
The GST compensation cess is transferred into a non-lapsable Fund known as GST Compensation Fund which forms part of the Public Account of India as provided in Section 10(1) of the Act. The States are compensated out of the Compensation Fund as per Section 10(2) of the said Act.
2.0 From the Parliament
The Finance Ministry in a written reply to Lok Sabha on 19th July, 2021 informed that GST compensation for financial years 2017-18, 2018-19 and 2019-20 has already been paid to the States.
The economic impact of the pandemic has led to higher compensation requirement due to lower GST collection and at the same time lower collection of GST compensation cess. GST compensation of ₹91,000 crore has been released to all States/UTs to partly meet the compensation payable for the period April’20 to March’21 as the amount in GST Compensation Fund was not adequate to meet the full compensation requirement.
The issue of GST Compensation to States has been deliberated in the 41st and 42nd GST Council meetings. Accordingly, in FY 20-21, Centre had borrowed ₹1.1 lakh crore under a special window and passed on to the States as back-to-back loan to help the States meet the resource gap due to short-release of compensation on account of inadequate balance in the Compensation Fund.
Subsequent to deliberations in the 43rd GST Council meeting, it has been decided that the Centre is borrowing ₹1.59 lakh crores from the market through special window in current FY and passing it on to the States/ UTs as a back to back loan in appropriate tranches as was done in last year. As per this decision ₹75000 crore has been released to States/ UTs on 15.07.2021. In addition, depending on the amount available in the Compensation Fund, Centre has also been releasing the regular GST compensation to States to make up for GST revenue shortfall.
3.0 Economic Indicators
|Public Debt of Central Government*|
|₹crore||% of GDP||₹crore||% of GDP|
|1. Public debt (2+3)||86,05,284||42.3%||1,02,39,307||51.9%|
|2. External debt||5,85,325||2.9%||6,55,941||3.3%|
|3. Internal debt||80,19,959||39.4%||95,83,366||48.5%|
|4. Other liabilities||8,56,981||4.2%||13,82,473||7.0%|
|Total Debt (1+4)||94,62,265||46.5%||1,16,21,781||58.9%|
*(Source: Central Statistics Office; Ministry of Finance)
The Central Government Debt to GDP ratio has already worsened from 46.5% in FY 2020-19 to 58.9% in FY 2020-21. The GST coffers in the Government Exchequer are already insufficient to meet the State’s GST Compensation requirements & since last year onwards Central Government has resorted to borrowing funds to pay GST compensation to the States. It seems that unless some other measures are taken by the Centre, it will have to resort to further borrowings in near future to meet the GST Compensation requirements which would in turn further worsen the economic indicators of the Indian economy.
Disclaimer: The article is for informative purposes only.
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