Government Announces, No Extension of GST Aid to States

The government announced in Parliament on Monday that the cesses on a few depreciating but also high-value goods meant to compensate state governments for any shortfall in their goods and services tax (GST) revenues from protected levels for the five years to June 2022 will have to be extended until FY26.

In order to make up for the shortfall in the GST compensation pool over the last two years, the Centre had to borrow Rs 2.69 trillion in total. The cesses will have to be maintained until FY26 in order to fund these debts.

The GST compensation to states, which is set to expire on June 30, 2022, has been made explicit by the Centre. It announced a Rs 1 trillion 50-year Capex loan to states in the most recent Budget.

For the first five years after the indirect tax regime was established in July 2017, the Centre will reimburse the states for any shortfall in GST receipts as required by law, according to Union minister of state for finance Pankaj Chaudhury.

In a written reply to the Lok Sabha, Chaudhury said, “The Centre is committed to release full GST Compensation to the States/UTs as per GST (Compensation to States) Act, 2017 for the transition period by extending the levy of Compensation cess beyond 5 years to meet the GST revenue shortfall as well as servicing the loan borrowed through special window scheme.” State governments are guaranteed a 14 per cent annual income increase under the GST compensation scheme for the first five years after the tax’s implementation in July 2017.

Many states, such as Tamil Nadu, West Bengal, and Chhattisgarh, have written to the Centre requesting that the compensation term be prolonged by two to five years in order to help the states’ finances.