GST compensation to states in the event of a COVID-19 pandemic

GST compensation for the fiscal years 2017-18, 2018-19, and 2019-20 has already been paid to the states under the provisions of the GST (Compensation to States) Act of 2017. Shri Pankaj Chaudhary, Union Minister of State for Finance, mentioned this in a written response to a question in the Rajya Sabha today.

The Minister went on to say that the pandemic’s economic impact has resulted in a larger compensation requirement due to decreased GST collection and, at the same time, lower GST compensation cess collection. On 03.11.2021, the Centre released 17,000 crore from the Compensation Fund for GST compensation to states. The Minister stated that this is in addition to the GST compensation of Rs. 1,13,464 crore released to States/UTs with the legislature to partially meet the compensation payable for the period April 20 to March 21 because the amount in the GST Compensation Fund was insufficient to meet the full compensation requirement.

The subject of deficiency in cess collection into the Compensation Fund and GST compensation to States/UTs due to the economic impact of the pandemic was discussed in the 41st, 42nd, and 43rd GST council meetings, according to the Minister. According to the GST Council’s resolution, 1.1 lakh crore for FY 2020-21 and 1.59 lakh crore for FY 2021-22 have been issued as back-to-back loans to States/UTs to help them fulfil their resource needs due to a shortage in GST compensation. This money was released early in the fiscal year to allow states and territories to spend it on capital projects. In addition, the Centre has started releasing regular GST compensation to States to make up for GST income shortfalls, based on the amount available in the Compensation Fund.

According to provisional figures, GST compensation of 37,134 crore for the period April 20 to March 21 and 14,664 crore for April-September 21 is pending to States/UTs, taking into account the GST compensation released from the Compensation Fund as well as back-to-back loans released in FY 2020-21 and FY 2021-22. The Minister stated that the Centre is committed to providing full GST compensation to the States/UTs for the transition period under the GST Act (Compensation to States), 2017 by extending the levy of Compensation cess beyond 5 years to meet the GST revenue shortfall as well as servicing the loan borrowed under the special window scheme.

On the proposal to extend GST compensation beyond 2022, the Minister stated that under Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, Parliament shall, by law, provide for compensation to the States for loss of revenue arising from the implementation of the goods and services tax for a period of five years from the date of implementation of GST, on the recommendation of the Goods and Services Tax Council. The states’ revenue is protected at 14 percent every year over the base year revenue of 2015-16 during the transition period. As per the Constitution, the Central Government has promised to providing GST compensation to States and UTs for a period of five years.

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