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Home Latest News

GST compensation cess may be required by 2025-26 on vehicles and tobacco

by InvestPolicy
February 28, 2021
in Latest News
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GST compensation cess may be required by 2025-26 on vehicles and tobacco
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People using automobiles, carbonated water and tobacco products may have to pay Goods and Services Tax i.e. GST on their purchases by the end of 2025-26. This is because the central government is finding ways through which it can fulfill the shortfall in their GST collection by giving compensation to the states as promised.

The 15th Finance Commission has estimated that from April 2020 to June 2022, the collection of state GST (SGST) may decrease by up to Rs 7.1 lakh crore. “Our calculations have shown that if the compensation cess is increased from 2025 to 2026, the estimated collections from it will be sufficient to compensate the amount given to the states,” the commission quoted the Center as saying.

It is to be noted that the Central Government is obliged to amend the Constitution to provide compensation to the States for any shortfall arising due to the implementation of GST for the next five years from the date of implementation of this new tax scheme. To pay the same compensation, GST compensation cess is levied on selected goods from the Center. Therefore during these five years, Compensation Cess was to be imposed on selected items from July 2017 to June 2022.

The reduction in revenue collection comes when the actual collection of SGST is less than the Projected Revenue in a year. Which was based on an estimated 14 per cent year-on-year growth on individual states’ revenue from the 2015-16 VAT, CST tax and other small taxes, which later joined the SGST.

The assurance of revenue protection ends in June 2022, but the Center is not in a position to fully pay the committed compensation even to that date. Therefore, it suggested extending the compensation cess from June 2022 onwards.

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All calculations of tax revenue growth worsened with the economic growth in which the GST was implemented. In most states, the tax collection was reduced from the first year itself, but luckily the Central Government had enough Compensation Cess Collection to pay the dues of the state in 2017-18 and 2018-19. This was followed by reduced economic growth and taxation in 2019-20, and epidemics and lockdowns worsened the financial situation of the Center and the states.

The result of all this was that not only did the gap between actuarial and assured collections increase, but the collection of compensation cess also declined. This is also the main reason behind the failure of the Center in failing to give the dues to the states.

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When it became clear that the states would have trouble giving GST compensation in the face of uncertain economic conditions, the GST Council in its meeting of 5 October 2020 decided to extend the compensation cess from June 2022 onwards. This deficiency had to be met by borrowing. The GST Council will also decide the time frame in which the cess will be imposed.

Finance Minister Nirmala Sitharaman has said that the Center will honor its promise and cess will be levied till all the shortfall is fully realized and all the loans including interest will be repaid.

Tags: compensation cessFinance ministryGoods and serviceGSTGST compensation cessNarendra ModiNirmala SitharamanSGST
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