Political tensions following COVID disruption to 5-year deal to compensate 28 states since 2017 GST compensation ends 1 July 2022
In July 2017 with the launch of India Goods and Services Tax, the GST Compensation Act, 2017 provided for five years of compensation payments to the 28 Indian states which lost revenues from the reforms. However, COVID-19 economic effects and lower tax receipts mean the states are now pushing for a further 5-year extension on the settlement.
The GST state reparation payments from the Centre government are made up of two elements:
- the difference between states’ collections and the amount states would have received with annual growth at 14% over the 2015-16 receipts; and
- a levy, or cess, on automobiles, tobacco, drinks across the country
The 2017 forecasts estimated that the compensation payments would only be needed for 5 years as the economy grew, and GST payments rose. Within the GST charge, there is an element of the tax reserved for the states (see below). In the second of the above repatriation pools, the cess, there is now a deficit of Rs 300,000 crore.
The GST Council will consider all options over the forthcoming months.
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How Central, State and Integrated GST work
Both the Central government and local States have the right to charge and share GST raised. This is based on the pre-July 2017 indirect taxes which were levied by both. They are referred to Central GST (CGST) and State GST (IGST), respectively. They are combined as Integrated GST (IGST). For simplicity, when GST is referred to, it generally means IGST. The taxes are combined for easy of management and reporting, and to prevent double taxation. For example, if the applicable GST rate is 18%, then as follows:
- Interstate (between two states) supplies: 18% IGST
- Intra-state (inside one state) supplies: 9% CGST plus 9% SGST = 18%
India GST rate streamlining is also on the reform agenda this year.
