Govt may continue GST compensation scheme till 2025

Govt may continue GST compensation scheme till 2025

News:

Government to Compensate GST loses to States for additional three years till 2025.

Important Facts:

• As mandated by Constitution the Union government plans to create a backstop facility for states to receive compensation for three additional years to implement the nationwide goods and services tax (GST) after the expiry of the first five years in 2022
• Decision aiming at ensuring that states grappling with a revenue shortfall after the implementation of the GST regime do not face a sudden fiscal shock when the five-year transition period ends in 2022.
• Constitutional guarantee for compensation of GST revenue losses for the first five years has given states the confidence that the central government does not take their needs for granted. This, along with the finance commission grant, will take care of states’ revenue requirements
• With the implementation of GST, states no longer have the full flexibility to raise additional taxes to meet any spurt in their revenue needs without the consent of the GST Council, therefore, dependent on the centre to a great extent.

How the devolution will be calculated:

• The GST revenue trends of states would be a key parameter in finalizing the commission’s formula for devolution of central government’s tax revenues to states
• The backstop facility would help continue compensation through an annual transfer of the center’s tax revenue to the states on recommendation of 15th Finance Commission.

Additional Facts:

• The Lok Sabha introduced the GST Compensation to States Bill in March 2017, and the bill was created to compensate states in case they have suffered any loss in revenue owing to GST implementation.
• The compensation offered by the bill is for a five-year period starting from the date when the State GST Act is implemented by the state.