Question: What is GST compensation? Explain the idea behind the GST compensation mechanism for the states.
Answer: The GST compensation was the mechanism to suitably compensate states for loss of revenue arising out of implementation of the GST. The compensation mechanism was a unique feature that remained up to five years from the date of implementation of GST.
- The nation-wide GST was levied based on the Constitution (One Hundred and First Amendment) Act, 2016.
- The constitutional law also contained a provision for compensation that had to be given to states to adjust to the shortfall with 14% growth annually.
Idea behind GST compensation
- Revenue shortfall
It was believed the states would endure a revenue shortfall if they gave up their rights to impose local-level indirect taxes. This was adjusted in form of compensation.
- Temporary stopgap
The arrangement was to be stopgap until states government found out new avenues for raising revenue. It would not continue beyond five years.
- The funds for GST compensation were raised through a compensation cess levied on so-called ‘demerit’ goods.
- This includes goods such as pan masala, tobacco, aerated waters and motor cars apart from coal.
Thus, GST compensation is very critical to states during the pandemic as they have lost their major revenue sources. Alternative mechanism has to be formulated to realize lost revenues.