Many states have requested an extension of the compensation mechanism under the GST beyond June 2022, Finance Minister Nirmala Sitharaman said on Monday. Under the Goods and Services Tax (GST) law, states were guaranteed to be compensated bi-monthly for any loss of revenue in the first five years of GST implementation from July 1, 2017.

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The shortfall is calculated assuming a 14 percent annual growth in GST collections by states over the base year of 2015-16. The 5-year period ends in June 2022.

The compensation amount to be paid from the compensation fund is arrived at by levying cess on top of the highest tax slab on luxury, demerit and sin goods. In a written reply in the Lok Sabha, Sitharaman said the central government is committed to giving GST compensation to states/UTs for 5 years as per the Constitutional provision.

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To a query whether the government has received proposals from state governments requesting an extension of the compensation mechanism for another five years in view of difficulties caused by the pandemic, she said "Yes Sir. Many states have requested for extension of the compensation period during the deliberations in GST Council and in letters addressed to the central government".

GST compensation for financial years 2017-18, 2018-19 and 2019-20 has already been paid to states. Since collections in the compensation fund are falling short of the requirement, for 2020-21 and 2021-22, the Centre has borrowed funds worth Rs 1.10 lakh crore and Rs 1.59 lakh crore, respectively and passed it on to states as back-to-back loans.

The compensation cess levied on luxury and demerit goods, will continue to be collected till March 2026 to repay the borrowings that were done in 2020-21 and 2021-22 to compensate states for GST revenue loss.

First Published:Mar 14, 2022 4:23 PM IST