Finance ministry extends GST compensation cess levy till March 2026
Days ahead of the Goods and Services Tax (GST) Council meeting, the Ministry of Finance has notified an extension of the levy and collection of compensation cess under the indirect tax regime till March 2026. This extension of cess levy is in line with an earlier approval accorded by the GST Council last year for repayment of loans meant to compensate states for the five-year period since the July 2017 rollout and is not for any extension of compensation to states beyond June 2022.
The GST Council had last year in September decided to continue compensation cess levy only for repayment of borrowed amounts beyond June 2022. “That (compensation to states) ends with five years. The five-year (period) ends in July 2022. Beyond July 2022, the cess that we are collecting, as agreed in the 43rd Council meeting, was for the purpose of repaying the loan. That commences in July 2022, and goes on till March 2026 — only and only for paying the loan given to states since last year,” Union Minister for Finance Nirmala Sitharaman had stated while briefing media after the 45th GST Council meeting in September 2021.
GST compensation payout
Under GST, states were guaranteed compensation at the compounded rate of 14 per cent from the base year 2015-16 for losses arising due to implementation of the taxation regime for five years since its rollout. The compensation regime will end in June.
“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.
In May, the Centre had cleared the entire GST compensation payable till date by releasing Rs 86,912 crore to states. Of this, Rs 25,000 crore was released from the GST compensation fund and the balance Rs 61,912 crore was released by the Centre from its own resources pending collection of cess.
Revenue slowdown
The states’ protected revenue grew at a slower rate than the guaranteed 14 per cent compounded growth in recent years and Covid-19 further increased the gap between protected revenue and the actual revenue receipt including reduction in cess collection. In order to meet the resource gap of the states due to short release of compensation, the Centre has borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loan to meet a part of the shortfall in cess collection.
Of the total compensation released in May, Rs 17,973 crore was towards April and May dues, Rs 21,322 crore towards February-March dues and Rs 47,617 crore was the balance of compensation payable up to January 2022. The Centre has repaid Rs 7,500 crore as interest cost for the borrowing in 2021-22 fiscal and Rs 14,000 crore is to be paid this fiscal. From next fiscal, the repayment of principal amount will start which will continue till March 2026.
