Goods and Services Tax (GST) is an indirect tax (or consumption tax) used in India on the supply of goods and services. It is a comprehensive, multistage, destination-based tax: comprehensive because it has subsumed almost all the indirect taxes except a few state taxes. Multi-staged as it is, the GST is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer and as a destination-based tax, it is collected from point of consumption and not point of origin like previous taxes.

Compensation Cess- Reason for implementation

• For the first five years ending in 2022, states are promised compensation if revenue growth falls below 14% (base year 2015-16).
• The Centre pays states GST compensation out of the Compensation Cess every two months.
• The GST (Compensation to States) Act of 2017 established the compensation cess.
• Except for those who export particular declared items or who have chosen the GST composition plan, all taxpayers are required to collect and send the GST compensation cess to the government.
• Compensation Cess Fund: According to the GST Act, the cess collected, as well as any amounts suggested by the GST Council, would be deposited to the fund.
• GST Compensation Cess also known as GST Cess was introduced to compensate states which are heavy on manufacturing. Due to the implementation of GST many states faced a decrease in revenue as it is a consumption based tax. Thus, states which were manufacture oriented faced a loss in revenue.
• To compensate these states, an additional tax by the name GST compensation cess is levied. It is imposed on certain notified goods and revenue collected from it is distributed amongst these states. This Cess will be levied for 5 years from the date of implementation of GST.

Challenges

• The economic slowdown, which has been on for almost three years now, began to impact GST revenue collections
• Decreased Center Devolution: The majority of states believe that the Center’s share of centrally-sponsored programmes has steadily decreased while the states’ portion has risen. As a result, their most pressing desire is to increase their participation in government-sponsored programmes.

• The state’s GST income shortfall in 2020-21 is predicted to be over Rs. 3 lakh crore, while cess collections are only likely to exceed Rs. 65,000 crore, leaving a Rs. 2.35 lakh crore shortfall.

Way forward

• States must recognise the reality and agree to a reduced amount of compensation, ideally tied to the nominal growth rate of the Indian economy.
• States cannot turn a blind eye to the pandemic’s effects.
• The Union government will also need to lead the country out of its GST stalemate by borrowing more money from financial markets or the RBI directly.
• The Centre must recognise that it is a legal requirement that they cannot waive.
• States should reciprocate by accepting a more realistic remuneration for the time being while evaluating the Center’s possibilities.

https://www.thehindu.com/business/Economy/the-status-of-gst-compensation-dues/article65381798.ece

How to structure

1. Give a brief intro about GST
2. Briefly explain about GST compensation Cess
3. Examine i=the reasons for its implementation
4. Mention challenges and write way forward