The government has decided to clear the entire outstanding amount of Rs 16,982 crore of GST compensation cess to the states. This move will bring major fiscal relief to the states and provide a much-needed boost to the country’s economic recovery. In this article, we will analyze the impact of this decision on the states’ finances, the GST revenue collections, and the overall economy.
Background and Significance of the GST Compensation Cess
The Goods and Services Tax (GST) was introduced in India in July 2017 as a comprehensive indirect tax reform. The GST replaced a complex system of multiple indirect taxes and aimed to bring transparency, simplicity, and uniformity in the tax regime. The GST has two components – the Central GST (CGST) and the State GST (SGST) – which are levied by the Central and State governments, respectively, on the value of goods and services.
To compensate the states for any revenue loss arising from the implementation of the GST, the government introduced a mechanism of GST compensation cess. The GST compensation cess is levied on certain goods and services that fall under the highest GST rate of 28%. The GST compensation cess is collected and credited to the GST compensation fund, from which the compensation is paid to the states for a period of five years from the GST implementation.
Delay in the Clearing of GST Compensation Cess
However, due to the economic slowdown, the GST revenue collections have been lower than expected, which has led to a delay in the clearing of the GST compensation cess to the states. The GST Council, which is the apex decision-making body for the GST, had discussed the issue of the delay in the compensation payments in several meetings but had not reached a consensus on the matter.
Resolution of the GST Compensation Cess Issue
The Finance Minister’s announcement of clearing the entire outstanding amount of Rs 16,982 crore of GST compensation cess to the states has resolved the long-pending issue of the compensation payments. This decision will provide a significant fiscal relief to the states, which have been facing financial stress due to the pandemic-induced economic slowdown.
The clearing of the compensation cess will also improve the states’ fiscal position and enable them to undertake more expenditure on development and welfare schemes. This will, in turn, boost the overall economic growth and employment generation.
Impact on GST Revenue Collections and Fiscal Deficit
The clearing of the GST compensation cess to the states will have a positive impact on the GST revenue collections as well. The GST revenue collections had shown a robust recovery in the recent months, crossing the Rs 1 lakh crore mark for the fifth consecutive month in January 2021. The clearing of the compensation cess will further enhance the states’ confidence in the GST system and encourage them to implement more reforms to improve the ease of doing business.
However, the clearing of the compensation cess will have an impact on the fiscal deficit of the Central government. The fiscal deficit, which is the difference between the government’s total expenditure and its total revenue, has widened significantly due to the pandemic-related expenditures and the lower revenue collections. The clearing of the compensation cess will add to the government’s expenditure and widen the fiscal deficit further.
Conclusion
In conclusion, the clearing of the entire outstanding amount of Rs 16,982 crore of GST compensation cess to the states is a significant fiscal relief for the states and a positive development for the overall economy. The move will improve the states’ fiscal position, boost the GST revenue collections, and provide a fillip to the economic growth. However, the impact on the Central government’s fiscal deficit should be closely monitored, and the government should take measures to contain the fiscal deficit within a reasonable limit.
