Govt May Release Rs 8,700 Crore to States as GST Compensation

The cess is meant to compensate states in the first five years of the new indirect tax regime for revenue losses.

Indian rupee banknotes of various denominations sit in a cash register.

(Photo: Dhiraj Singh/Bloomberg)

The Centre is likely to release around Rs 8,600-8,700 crore to states for losses incurred in the first two months of implementation of the Goods and Services Tax, two government officials told BloombergQuint.

The government collected Rs 7,198 crore in compensation cess for July, according to data available as of 29 August. For August, that figure stood at Rs 7,823 crore, according to data available as of 25 September.

The cess is meant to compensate the state governments in the first five years of the new indirect tax regime for potential revenue losses from the transition to GST. The revenue for each state will be calculated by applying the projected revenue growth rate of 14 percent with 2015-16 as the base year.

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The compensation to states in July-August is lower compared to the cess collected as state governments received part of their revenue as value added tax collections for June in the month of July, thus achieving the required revenue growth rate, according to one of the officials quoted above. A clearer picture of the compensation will emerge in September-October, he added.

Pratik Jain, partner and indirect tax leader at PwC India, concurs. These are tentative numbers, and factors such as refunds to exporters need to be accounted for, he told BloombergQuint over the phone.

If compensation cess collected is higher than actual losses incurred by states, it would be expected that the government would gradually reduce the compensation cess.

Pratik Jain, Partner and Indirect Tax Leader, PwC India

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The compensation cess is levied over and above the highest GST rate of 28 percent on sin goods like cigarettes, pan masala and large cars, among others.

The government’s overall GST collection stood at roughly Rs 94,063 crore in July, as per data as on 31 August and Rs 90,669 crore for the month of August, according to data available as on 25 September.

(This article was originally published in BloombergQuint.)

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