Reportedly, the request of the State Governments to extend the period of GST compensation beyond five years is likely to be rejected by the 15th Finance Commission. According to the Commission, the tax buoyancy will take care of the current shortfall in revenue in some states.
To compensate these states, an additional tax by the name GST compensation cess is levied. It is imposed on certain notified goods and revenue collected from it is distributed amongst these states. This Cess will be levied for 5 years from the date of implementation of GST.
“As GST is a consumption-based tax, the real problem with states is that the guaranteed compensation will end in two years from now, which covers two out of the five years of my award period beginning 2020-21. Some of the states are worried because they are not getting that degree of growth. The changes in GST have now more or less settled down. I now see growth on a more positive wicket. I don’t believe it is necessary nor would it be appropriate (to extend GST compensation). I expect the growth momentum to take care of it,” said the chairman of the 15th Finance Commission, N.K. Singh.
The revenue leak to the States due to the GST launching shall be payable during the transition period of five years till 2021-22, according to the provisions of the GST (Compensations to States) Act, 2017.
The financial year 2015-16 has been taken as the base year for calculating the compensation amount payable to states and the projected nominal growth rate of revenue subsumed for a state during the transition period is assumed to be 14% per annum. The total compensation payable in any financial year is the difference between the projected revenue for any financial year and the actual revenue collected by the state.