Gst Compensation

Last modified:2019-09-16


GST Compensation came along with the announcement of implementation of GST in India. GST Compensation Bill was passed few months before the GST was implemented after the approval from State and both the Assemblies. GST Compensation is given for the States for the loss faced due to GST and more details on the Bill are given in this article.

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GST Compensation and GST

GST is considered as a history move in the Indian economy as the process of implementing and the discussions went on for a long time. Even before GST was implemented from July 1, 2017, GST Compensation Bill was introduced which compensates the states with any losses occured due to the implementation of GST and the Bill was passed along with implementation of GST. GST Compensation was announced for a period of five years and the compensation was released for each states. States which received top compensations are Karnataka, Gujarat, Punjab, Rajasthan, Bihar, Uttar Pradesh, West Bengal and Odisha.

What is GST Compensation?

Before the introduction of GST, taxes were collected under different categories and state government had much advantage over the Central government as most of taxes levied were directed towards the respective states. Upon the planning and decision of GST, it was found that the state government faces more losses when GST was introduced. So in order to implement the uniform taxation and to manage the losses incurred by the state governments, GST Compensation Bill was approved and passed to compensate the losses occurring to to implementation of GST in States. GST Compensation is calculated on bimonthly basis and also annually. GST Compensation is calculated based on the provisional basis and it is released at the end of every two months.

What is GST Compensation Cess?

To understand about GST Compensation Cess, let’s first understand what is Cess. Cess is nothing but application of tax on tax. Cess under GST is a compensation cess that will be levied on certain goods and services under GST Act 2017 and it is also applied on interstate and intrastate transaction of goods and services. GST Compensation Cess is applied on selected goods and services like sin goods and luxury goods in common. GST Compensation Cess is applied for certain goods and also services and in turn the amount received falls under GST Compensation Fund. Cap of Cess for pan masala is 135% whereas it is 15% for all other commodities and services. Also if the GST compensation fund is not utilised within the said compensation period, then the amount is distributed as 50% of the fund between the two states in their revenue ratio and remaining 50% as central’s divisible tax pool.

How to Calculate GST Compensation Cess?

GST Compensation Cess is calculated only for the items specified in the Bill approved and also on the rates approved for that specific item. For goods that are imported, taxable value plus the customs duty is levied which is same as IGST. For GST compensation amount for any financial year, calculation is performed by having the base year as 2015-2016. Any state revenue growth for 5 years is considered to be 14%. Let’s see how GST Compensation Cess is calculated. If you are buying an automobile worth Rs. 5 lakh with 28% GST and 1% GST Cess here is how the value is calculated.
CGST = 14% = 70,000
SGST  = 14% = 70,000
Cess of 1% = 5000
Therefore final value of the car is calculated to be Rs. 6,45,500.

What are the Goods on which GST Compensation Cess is Applied?

The different goods on which GST Compensation Cess is applied are listed below.
  • Pan Masala
  • Tobacco and manufactured tobacco substitutes, including tobacco products
  • Coal, briquettes, ovoids and similar solid fuels manufactured from coal, lignite
  • Aerated waters
  • Motor cars and other motor vehicles principally designed for the transport of persons
  • Any other supplies

What is the Solution for the States that are Affected by GST?

With the implementation of GST, many states especially the producing states are much affected when compared to the other states. Because of the fact that GST is applicable at the destination place, the consuming states are benefited. Producing states are adversely affected due to this reason. Some of the states that are more affected are Karnataka, Maharashtra, Haryana, Tamil Nadu and Gujarat. These states had requested for 100% GST compensation throughout the five years. But the Centre has advised the 14th Financial Commission to compensate 100% for the financial loss for only first three years, 75% for the fourth year and 50% for the fifth year.  

Statistics on GST Compensation

It was accounted that the revenue loss to states on implementation of GST was Rs 24,500 crore for the months between July and October and the Centre has released compensation to make up for it. The first GST compensation was released in the month of November 30, 2017 and as per the details, Karnataka got maximum compensation from the Centre at Rs 3,271 crore, followed by Gujarat (Rs 2,282 crore) and Punjab (Rs 2,098 crore). Under the Goods and Services Tax (GST) regime, a cess is levied on luxury, demerit and sin goods to make good the loss suffered by the states on account of roll out of the new indirect tax regime. This is levied on top of the highest tax rate of 28 per cent on this goods.

Latest Updates on GST Compensation

In the last fiscal, the government collected around Rs. 62,021 crore as cess on just sin and luxury goods. The amount collected will be used for the compensation to states for any revenue shortfall faced by states on implementation of GST.  The compensation released to the states for July till February was Rs 41,147 crore to ensure that the revenue of the states is protected at the level of 14 per cent over the base year tax collection in 2015-16. The base year for calculating GST Compensation was 2015-16 upon which other amounts are maintained. The revenue gap of each state is coming down over last eight months. The average revenue gap of all states for last year is around 17 per cent. 

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