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economy | IST

Centre not in favour of extending GST compensation period beyond 5 years

Mini

According to a provision in the GST Act, revenue shortfalls arising from the implementation of GST across the country would be made good from a GST Compensation Fund for a period of five years. This period is set to end in 2022. And the Centre is not inclined to extend this period beyond 2022. However, it has suggested measures to the States that can help them increase revenues.

The Centre is not inclined towards extending the Goods and Services Tax (GST) Compensation period for States beyond March 2022, however, a proposal for zero-rated GST compensation to the states might be in the works, sources told CNBC-TV18 Monday.
The Centre argued that GST revenues should grow, instead of it paying compensation to the states. Moreover, the Centre pitched that States should revisit rates, correct inverted duties, and increase compliance so that a more long term, stable source of revenue is available to them over a period of time.
The States had requested the Centre to extend the GST compensation period by five years, beyond FY22 due to the severe shortfall in revenue owing to disruption in economic activity.
The 101st amendment of the GST Constitutional Act of 2016 included a provision to compensate the States for loss of revenue due to the implementation. According to the provision,  revenue shortfalls arising from the implementation would be made good from a GST Compensation Fund for a period of five years. This period is set to end in 2022.
The States and Centre are already stuck with repayments of possible market borrowings of Rs 2.69 lakh crores by the end of this fiscal. And sources say these repayments could stretch well over three years after July 2022.
So far, this fiscal year, the Centre has lent Rs 75,000 crore out of its own market loans to States, from an estimated Rs 1.59 lakh crore of GST Compensation shortfall this year. While Rs 1.10 lakh crore of market borrowing was done in FY21 and Rs 81,000 crore of compensation arrears are yet to be paid, taking the total tab to Rs 3.5 lakh crore.
The sources also said the Centre could consider toying with the idea of a possible zero-rated GST compensation. According to this, the Centre would protect States' FY22 revenues. So if after July 2022, any state collects revenues less than FY22-level, then to that extent the Centre will guarantee compensation.
The Centre may propose this measure to convince the States to correct duties and revise rates.