GST compensation: Centre transfers ₹75,000 crore to states, UTS


The central government on Thursday transferred 75,000 crore it borrowed from the market to states in goods and services tax (GST) compensation, helping states to spend early in the financial year to support economic recovery. Union territories with a legislature will also receive the funds.

The Union finance ministry said in a statement that this is almost half of 1.59 trillion the Centre had agreed to transfer to states as part of GST compensation financed through borrowing, and is in addition to another 1 trillion being transferred in instalments from GST cess collection.

The move is expected to be a big relief to states that are making healthcare investments to prepare for a possible third wave of the covid pandemic and are financially supporting small businesses to stay afloat and protect jobs. It is also expected to help relieve the tension between Centre and opposition-ruled states over delays in GST compensation payments ahead of the monsoon session of Parliament beginning Monday.

The total GST compensation that states would be getting in FY22 would be 2.59 trillion. The part of it paid out of proceeds of GST cess levied on items like automobiles is being released to states on a bimonthly basis. The amount of compensation financed through debt will form part of states’ fiscal deficit, and not the Centre’s.

States with large economies are the biggest recipients of compensation in absolute terms. Karnataka received 8,542 crore, Maharashtra 6,501 crore and Gujarat 6,151 crore. Haryana, Kerala and Punjab too were big gainers.

The scheme of borrowing from the market to complement the compensation paid out of GST cess receipts was agreed by the GST Council on 28 May. Last year, a similar arrangement was adopted as cess collection was insufficient to meet the requirement of states that suffered revenue losses from the indirect tax reform. The Centre had agreed to make up for the states’ revenue losses for the first five years of the GST roll-out until June 2022 as part of a grand bargain to get states on board for the 2017 tax reform. States are pitching for an extension of GST compensation by another five years. A special GST Council meeting will be held in August to discuss this.

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