2.78 lakh crore of compensation released to States for the year 2020-21 itself ; nothing is pending for the year

The Constitution was amended at the time of the establishment of GST to stipulate that the Parliament, by law, would compensate states for revenue lost owing to the introduction of GST for a period of five years. As a result, the GST Compensation to States Act was enacted, which allows for compensation against a 14 percent year-on-year increase in income from GST-subsumed taxes in 2015-16. This compensation cess is applied to the compensation fund, which, according to the Act, is used to pay all compensation. Cess is currently charged on commodities such as pan masala, cigarettes, coal, and automobiles.

Compensation of roughly 49,000 crore was paid out of the fund in 2017-18, increasing to 83,000 crore in 2018-19 and then to 1.65 lakh crore in 2019-20. Almost 3 lakh crore in compensation has been paid to states during the last three years. However, due to the impact of covid on revenues, the compensation demand grew significantly in 2020-21. To guarantee that States have sufficient and timely resources to address covid and related concerns, the Centre borrowed 1.1 lakh crore in 2020-21 and 1.59 lakh crore in 2021-22, and transferred it on to States in a back-to-back manner. The Centre ensured that the release of this amount of 1.59 lakh crore was front-loaded in 2021-22 to guarantee that States had adequate resources in the first half of the year.

Taking this loan into consideration, 2.78 lakh crore in compensation has already been granted to states for the 2020-21 financial year, with nothing outstanding for the next year. To date, 7.35 lakh crore has been granted to States, including back-to-back assistance, and compensation of 78,704 crore is pending for the financial year 2021-22 due to insufficient fund balance, which is equivalent to compensation for four months.

Compensation for the 10 months of April-January of any financial year is usually provided within that year, but compensation for the months of February-March is usually released only the following year. As previously stated, States have already received compensation for eight of the ten months of 2021-22. The pending amount will be issued as soon as the cess money is received in the compensation fund.