• The Centre has cleared the entire GST compensation payable till date by releasing Rs 86,912 crore to states.

• Of this, Rs 25,000 crore is released from the GST compensation fund and the balance Rs 61,912 crore is being released by the Centre from its own resources pending collection of cess.

• This decision was taken to assist the states in managing their resources and ensuring that their programmes, especially the expenditure on capital is carried out successfully during the financial year.

• Of the total compensation released, Rs 17,973 crore is towards April and May dues, Rs 21,322 crore towards February-March dues and Rs 47,617 crore is the balance of compensation payable up to January 2022.

What is GST compensation to states?

• The Goods and Service Tax (Compensation to States) Bill, 2017 was passed by Lok Sabha on March 29, 2017 to provide for compensation to the states for the loss of revenue arising on account of implementation of the GST in pursuance of the provision of the Constitution (One Hundred and First Amendment) Act, 2016. 

• Compensation will be provided to a state for a period of five years from the date on which the state brings its SGST Act into force. 

•  For the purpose of calculating the compensation amount in any financial year, year 2015-16 is assumed to be the base year, for calculating the revenue to be protected. 

• The growth rate of revenue for a state during the five-year period is assumed to be 14 per cent per annum. 

The base year tax revenue consists of the states’ tax revenues from: 

i) State Value Added Tax (VAT)

ii) Central sales tax

iii) Entry tax, octroi, local body tax

iv) Taxes on luxuries 

v) Taxes on advertisements, etc. 

• However, any revenue among these taxes arising related to supply of alcohol for human consumption, and five specified petroleum products, is accounted as part of the base year revenue. 

• A GST Compensation Cess is levied on the supply of certain goods and services, as recommended by the GST Council to finance the compensation cess.

• The GST Compensation Cess levied under Section 8 of the GST (Compensation to States) Act, 2017 is transferred into a non-lapsable Fund known as GST Compensation Fund which forms part of the Public Account of India as provided in Section 10(1) of the Act. 

• The states are being compensated for any loss of revenue arising on account of implementation of GST for five years out of the Compensation Fund as per Section 10(2) of the said Act. 

• In order to meet the resource gap of the states due to short release of compensation, Centre has borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loan to meet a part of the shortfall in cess collection.

• In addition, the Centre has also been releasing regular GST compensation from the fund to meet the shortfall. 

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