Govt releases Rs 86,912 cr to states, clears entire GST compensation dues

Ahead of the compensation regime for goods and services tax (GST) that ends in June, the Centre has released the entire compensation of Rs 86,912 crore due to states.

This step was taken to help states in managing their resources. It was also to ensure that their programmes — especially expenditure on capital —  were carried out successfully during the fiscal year, the finance ministry stated on Tuesday.  The full compensation was made even when the cess fund had an inadequate balance of just Rs 25,000 crore.

Compensation to states will be paid out of the compensation fund since the inception of the GST regime. The balance has been paid from the Centre’s own resources pending collection of cess, the ministry said.

Of the Rs 86,912 crore released to states, Rs 47,617-crore compensation was due up to January, Rs 21,322 crore was due for February-March, and Rs 17,973 crore was due for April-May. Under the compensation regime, the Centre is mandated to compensate states until June 30 for any loss in revenue under the GST. The government had clarified earlier that the compensation period may not be extended beyond the June-end deadline.

To meet the shortfall in GST compensation to states, the Centre said that it borrowed Rs 1.59 trillion in FY22 and Rs 1.1 trillion in FY21 from the market and passed them on to the states. The compensation cess will continue up to 2026. It will be used to fund debt obligations.

The Centre had assumed a 14 per cent annual GST revenue growth following the implementation of GST in July 2017. To compensate states for revenue loss, a cess was levied on several luxury items and so-called sin goods to mop up resources.

However, economic recovery slowed down due to the pandemic. It impacted the cess collections, resulting in inadequate balance in the cess fund.

“The states’ protected revenue has been growing at 14 per cent (compound growth) whereas the cess collection did not increase in the same proportion. Covid further increased the gap between protected revenue and the actual revenue receipt, including reduction in cess collection,” ministry noted.

With the concerted efforts of the Centre and states, gross monthly GST collection, including cess, has been showing a remarkable progress, it noted.