Before the 38th GST Council meeting on Wednesday, the centre has released another tranche of GST compensation to states and UTs.  The new tranche amounts to Rs 35298 crores and will be released soon.

With this, the total cess released to the States amounted to Rs 65,250 crore.

During the previous year (2017-18), total cess collected was Rs 62,596 crore. Of this, centre released Rs 41,146 crore. As a result, the balance of Rs 15000 crore was planned to be carried forward to the next year.

But this time, the revenue from compensation cess is not enough.

Despite falling revenues from GST, the centre’s gesture may make state mild at a time when both parties are searching options to enhance revenue from India’s most coveted tax.

Several states especially non-NDA states were demanding quick release of compensation and was about to express their views at the next GST Council meeting. Now, with the centre opting to release a part of compensation, states can join the centre to design more revenue enhancement steps at Wednesday’s meeting.

GST compensation to states comes in case when state’s tax revenues fall short of their pre-GST position. As per the GST Act, States and UTs with Assemblies are guaranteed compensation if the GST revenue growth is less than 14 per cent.

The compensation should be distributed bimonthly.

Compensation was an important component of the GST package. Purpose of the compensation clause was to incentivise states to accept and implement the GST.

Compensation amount will be collected from the cess imposed on GST.

GST Compensation Cess is imposed as a levy in addition to the regular GST taxes. The cess is imposed on the supply of certain luxurious and demerit goods and services that attract 28 per cent GST. The cess rate usually ranges from 1% to 25% and is levied over and above the GST rate.

But in recent months, the revenue from the cess is inadequate to compensate the losses to states.

Finance Minister Nirmala Sitharaman indicated the Parliament that during the current year (2019-20), Rs 55,467 crore were collected from the GST compensation cess till October 31st. On the other hand, the distributed amount is Rs 65,250 crore. So, the centre is going ahead of tax collection while compensating the states.

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