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What is GST Compensation Cess

GST Compensation:

The Centre will release ₹30,000 crore as GST compensation to States this month, from the compensation cess collections during the year.

  • The pending compensation dues to States for 2020-21 are expected to be more than ₹77,000 crore.
  • The GST Compensation Act, 2017 guaranteed States that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
  • However, the economic slowdown has pushed both GST and cess collections down over the last year, resulting in a 40% gap last year between the compensation paid and cess collected.
  • States are likely to face a GST revenue gap of ₹3 lakh crore this year, as the economy may contract due to COVID-19, which Finance Minister Nirmala Sitharaman termed an unforeseen “act of God”.

Compensation cess:

  • The modalities of the compensation cess were specified by the GST (Compensation to States) Act, 2017.
  • This Act assumed that the GST revenue of each State would grow at 14% every year, from the amount collected in 2015-16, through all taxes subsumed by the GST.
  • A State that had collected tax less than this amount in any year would be compensated for the shortfall.
  • The amount would be paid every two months based on provisional accounts and adjusted every year after the State’s accounts were audited by the Comptroller and Auditor General.
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