Six years of GST: Compensation cess still needs to be sorted out

Source– The post is based on the article “Six years of GST: Compensation cess still needs to be sorted out” published in the “mint” on 4th August 2023.

Syllabus: GS3- Government budgeting

Relevance: Issues related to GST

News– The article explains the issues related to GST compensation cess.

What are some facts related to GST compensation cess?

The funding for GST compensation was sourced from a cess imposed on specific goods listed in a schedule to the 2017 Act. These mainly include tobacco, coal-based solid fuels, and fossil-fuelled motor vehicles.

The schedule was also open-ended, allowing for the inclusion of any other supplies. This approach represented an exceptional statutory commitment to provide additional revenue.

What are facts and statistics related to shortage in cess collection?

Pandemic led to a significant increase in the required compensation while the collections from the cess declined. To address this discrepancy, the Centre resorted to special borrowing to cover the deficit in GST compensation.

During the 49th meeting of the GST Council in February 2023, the outstanding payments for June 2022 amounting to ₹0.16 trillion, were announced.

During the five-year statutory period, states received a total of ₹5.89 trillion in GST compensation, averaging ₹1.18 trillion per year.

However, the average annual revenue from the cess was only ₹0.96 trillion. It is falling below the average annual compensation required.

The cess collection for the entire financial year 2022-23 is totaling ₹5.76 trillion. It is still lower than the ₹5.89 trillion payout.

The shortage in cess collection was not evenly distributed across all years. There was a surplus in the pre-pandemic year 2018-19. Yet ,₹0.15 trillion of arrears remained unpaid until the beginning of 2022-23.

The likely reason for this delay is the late supply of audited figures of state revenues.

What is the government’s future plan for cess?

In September 2021, during the 45th meeting of the GST Council, it was proposed to extend the cess until March 2026 to cover the repayment of the Centre’s special borrowing used to compensate for the pandemic years.

In the most recent meeting, the GST Council recommended amending the Compensation Act rules to broaden the definition of taxable vehicles under the cess.

Way forward-

GST Compensation Act does allow for a surplus in the compensation fund to be divided between the Centre and states in a specified manner. But, once its statutory function is fulfilled, it should be reclassified separately from the Compensation Act.

There is a need to consider repurposing and renaming the compensation cess on items like tobacco, coal, and fossil-fuelled transportation as a Pigouvian levy on goods with negative health or climate impacts.

However, the utilization of the proceeds from such a climate cess should be guided by experts working in India on climate action. Additionally, the process to track the effectiveness of these critical expenditures needs to be carefully designed.