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Compensation for last fiscal paid to States using previous years’ balance of cess

The Centre made up a 42% shortfall in Goods and Services Tax compensation cess collection in 2019-20 by using balance of cess from previous years, plus a transfer from the Consolidated Fund of India. Meanwhile, the GST Council, which was slated to meet this month to discuss the possibility of market borrowing to meet likely future shortfalls, is yet to do so.

The final instalment of GST compensation for the year — ₹13,806 crore for March — has been released to the States, the Finance Ministry said in a statement on Monday. This completes the delayed compensation payments for the financial year.

During 2019-20, the cess collected was only ₹95,444 crore, just under 58% of the ₹1.65 lakh crore that was paid out to States. “To release the compensation for 2019-20, balance of cess amount collected during 2017-18 and 2018-19 was also utilised. In addition, the Centre had transferred ₹33,412 crore from the Consolidated Fund of India to the Compensation Fund as part of an exercise to apportion balance of IGST pertaining to 2017-18,” the ministry said.

States had been protesting the delay in payment of pending compensation even before the COVID-19 pandemic led to a sharp fall in revenues and further delays, with some States even threatening legal action. GST revenue fell 41% in the first quarter of 2020-21, indicating that the shortfall in cess collections and likely delays in payments to States is likely to continue in the current financial year.

Council yet to meet

After the GST Council’s last meeting on June 12, Finance Minister Nirmala Sitharaman told journalists that on the request of all State Finance Ministers, another meeting of the Council would be held in July “to discuss exclusively one agenda point, and that is compensation cess which has to be given to the States, and if at all it results in some kind of borrowing, how and who is going to pay for it.” However, the meeting is yet to be scheduled.

The GST regime, introduced in 2017, promised that the Centre would pay States full revenue compensation for the first five years, calculated using 2015-16 as the base year, assuming a 14% annual growth rate in a State’s revenue.

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