The Goods and Services Tax (Compensation to States) Act, 2017 was enacted to levy Compensation cess for providing compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force (01/07/2017), for a period of five years.
The growth rate of revenue for a State during the five-year period was assumed at 14 per cent a year. Compensation is paid bi-monthly while the last instalment for any financial year is given in the next year.
Government sources reportedly said that since the last release of GST compensation cess of ₹19,950 crores to States and UTs made in February for the months of October and November 2019, the Centre has released a total of ₹1.20-lakh crore in 2019-20 against a collection of ₹95,000 crores. No State/UT has been paid compensation for any period beyond October-November. Since the end of August 2019, the Centre has been in a precarious position while paying GST compensation to the States and UTs. On an average, the monthly GST compensation cess requirement was to the tune of ₹14,000 crores while the cess collection on an average was only ₹7,000-₹8,000 crore per month.
The compensation cess is a cess that will be collected on the supply of select goods and or services or both till 1st July 2022. The cess will compensate the states for any revenue loss on account of implementation of GST. This cess will not be payable by exporters and those persons who have opted for compensation levy. The input tax credit of this cess can be only used to pay compensation cess and not the other taxes like CGST, SGST or IGST.