GST compensation to states

INTRODUCTION

One of the biggest challenges while introducing the Goods and Services Tax (GST) Act in India was that states were opposing the Goods and Services Tax (GST) Act, because of their fear of losing revenue after the introduction of Goods and Services Tax (GST) Act. That is major because earlier the states independently levied Value Added Tax (VAT) on intrastate sales. Moreover, they also received Central Sales Tax (CST) on inter-state movement of goods (Revenue accrued to the initiating state). Now with the implementation of the Goods and Services Tax (GST) Act, the power to levy and collect tax was being made in conjunction with the power of the Central Government. Moreover, the Goods and Services Tax (GST) Act being a destination-based tax, in case of inter-state sales the revenue would accrue to the destination state as against the initiating state earlier. The fear was more pronounced in the case of manufacturing/ supplier states since the Goods and Services Tax (GST) Act was to accrue to the state(s) where the actual consumption of goods takes place. 

To assure a steady flow of revenues to the states by way of compensating the loss, Clause 18 of the constitution (one hundred and first amendment) act, 2016 specifically provided that the Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax (GST) Act for 5 years.

In line with the Constitutional amendment, the Government enacted the legislation known as, the goods and services tax (compensation to states) act, 2017. Under the said Act, GST Compensation Cess would be charged on some specific items, and proceeds from the same will be used to compensate for the revenue losses arising to the States due to implementation of Goods and Services Tax (GST) Act in the country.

Structure of the Goods and Services Tax (Compensation to States) Act, 2017

The entire contents of this Act can be divided into three parts for better understanding the provisions of this Act

  • One part of this Act deals with compensation to be paid to the States for loss of revenue because of the implementation of GST.
  • The second part of this Act deals with Cess to be levied on Certain Goods/ Services to collect funds for arranging the amount of compensation to be paid to States.
  • Another part of this Act deals with the Goods and Services Tax Compensation Fund and other incidental provisions and power to make rules.

LEVY AND COLLECTION OF CESS

There shall be levied a cess on such intra-State supplies of goods or services or both, and such inter-State supplies of goods or services or both and collected in such manner, on the recommendations of the Council, to provide compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax, for 5 years or for such period as may be prescribed on the recommendations of the Council.

No such cess shall be leviable on supplies made by a taxable person who has decided to opt for composition levy under section 10 of the Central Goods and Services Tax Act, 2017. 

The cess shall be levied on such supplies of goods and services based on value, quantity or such basis at such rate not exceeding the rate set forth as the Central Government may, on the recommendations of the Council, by notification in the Official Gazette, specify: 

Where the cess is chargeable on any supply of goods or services or both with reference to their value, for each such supply the value shall be determined under section 15 of the Central Goods and Services Tax Act for all intra-State and inter-State supplies of goods or services or both: 

Cess on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975, at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962, on a value determined under the Customs Tariff Act, 1975.

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