What is it?

• The GST regime was launched on July 1, 2017, that introduced a uniform indirect tax structure across the country by merging various state and local-level levies.
• Under the GST compensation Act 2017, states are guaranteed full compensation for any revenue loss for the first five years after the introduction of the GST.
• For the purpose of calculating the compensation amount in any financial year, year 2015-16 will be assumed to be the base year, from which revenue will be projected. The growth rate of revenue for a state during the five-year period is assumed to be 14% per annum. 
• Any shortfall has to be compensated from the receipts of Compensation Cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco commodities.

Why in News?

• According to a finance ministry statement, the Union government released Rs 1,65,302 crore as GST compensation to states in the previous financial year ended March 31, even as compensation cess collection fell by over 42% that year.
• States had been protesting the delay in payment of pending compensation even before the COVID-19 pandemic led to a sharp fall in revenues and further delays, with some States even threatening legal action. 
• GST revenue fell 41% in the first quarter of 2020-21, indicating that the shortfall in cess collections and likely delays in payments to States is likely to continue in the current financial year.

Related information

What is Cess?

• Cess is a tax that is levied by the government to raise funds for a specific purpose. For example: Secondary and Higher Education Cess.
• The proceeds from cess should be spent only for a specific purpose for which it is created.
• The Union government does not have to share proceeds from cess with the states as they are not part of the divisible pool that needs to be shared with states.

Reference:

1. https://www.hindustantimes.com/india-news/union-govt-paid-rs-1-65-lakh-crore-gst-compensation-to-states-in-fy20-fin-min/story-oD6NVwyXUjxQvJNselvzJO.html