GST compensation: Some states may get relief package

12/04/2022
The Centre may offer a special package to states to tide over financial difficulties as the compensation regime for the goods and services tax (GST) ends in June this year after the agreed five-year period.

The package may be discussed at the next GST Council meeting and could include financial assistance for specific projects, permission for a special levy and flexible borrowing options among others. Finance minister Nirmala Sitharaman had said last week in Parliament that the compensation period will end in June 2022.

Officials in the finance ministry said the government is aware of the financial difficulties of some states and is working on both short-term and long-term measures to support them. "Some states have genuine difficulty, mainly hill states. Some states have also requested permission for a special levy," a senior ministry official told ET.

Hill States Lack Revenue Sources
"All these options are being looked at and will be discussed at the next GST council meeting," the official said.

With assistance from the Niti Aayog, the Centre is also planning to help revenue-deficit states identify projects and sectors that can shore up revenue collections. States were guaranteed compensation for any loss of revenue for the first five years when GST was rolled out on July 1, 2017.

According to MS Mani, partner, Deloitte India, while there is a remarkable improvement in total GST collection, there is divergence among states that needs to be analysed. "There is significant divergence amongst states with increases in the range of 2% to 23% amongst the large states," he said.

Key opposition-ruled states such as Tamil Nadu, West Bengal and Chhattisgarh have demanded that the compensation period be extended.

Some of the BJP-ruled ones like Uttarakhand and Himachal Pradesh have also asked the Centre to extend the compensation period beyond June 30.

Most of the hill states lack their own revenue sources, increasing their dependence on the Centre. A special temporary levy on GST could help them meet financial difficulties. However, such levies distort the tax structure and are usually avoided.

Team Edu-Visor