States requested for five-year extension on GST compensation: Finance Minister

Many states have asked for an extension of the GST compensation mechanism beyond June 2022, according to Finance Minister Nirmala Sitharaman. Sitharaman stated in a written reply to the Lok Sabha that the central government is committed to providing GST compensation to states and UTs for a period of five years, as required by the Constitution.

States were granted bi-monthly compensation for any revenue loss in the first five years of GST implementation from July 1, 2017, under the Goods and Services Tax (GST) law.

“In this regard, it is stated that, pursuant to 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,” Sitharaman wrote.

The shortfall is determined using a 14 percent yearly increase in state GST collections from 2015-16 as the base year. The 5-year period will come to an end in June 2022.

“Yes Sir, she answered in response to a question about “whether the government had received suggestions from state governments demanding a five-year extension of the compensation system due to the pandemic’s hardships.” During the GST Council’s debates and in letters to the central government, a number of states have asked for an extension of the compensation period.

GST compensation has already been given to states for the fiscal years 2017-18, 2018-19, and 2019-20.

Because compensation fund revenues are falling short of expectations, the Centre has borrowed money worth Rs.1.10 lakh crore and Rs.1.59 lakh crore for 2020-21 and 2021-22, respectively, and handed them on to states as back-to-back loans.

The compensation cess, which is paid on luxury and depreciated products, would be collected until March 2026 to repay the borrowings made to compensate states for GST income losses in 2020-21 and 2021-22.