The implementation of GST as the sole indirect tax in place of the earlier multiple taxation legislations has reasonably raised a probability of States losing a part of their revenue from tax, in response to which the Centre has enacted the Compensation to States Act[i] along with the principal Acts of GST.[ii] Here we analyze the provisions relating to the said Act, to get a brief picture of how the scheme will be put to effect.
The Act intends to provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax. For the purposes of calculation and determination of the compensation amount, the Base year revenue of the State is calculated in accordance with the Act. The base year revenue for a State is the sum of the revenue collected by the State and the local bodies during the base year, on account of the taxes levied by the respective State or Union net of refunds with respect to the taxes subsumed into GST such as VAT, Sales tax, Purchase Tax, entry tax, octroi, local body tax, etc. The projected revenue for any year in a State is to be calculated by applying the projected growth rate over the base year revenue of that State, and the projected growth rate has been fixed at 14%.
Compensation under the Act is payable to any State during the transition period, and the calculation and release is to be done at the end of every two months, and an annual final calculation is made at the end of every financial year by the CAG. Any excess amount released to any State during a financial year will be adjusted against the compensation in the subsequent financial year.
The manner of calculation of the loss of revenue is also elaborated as:
- The projected revenue that could have been earned by the State in absence of the goods and services tax till the end of the relevant two months period of the respective financial year shall be calculated on a pro-rata basis as a percentage of the total projected revenue for any financial year during the transition period[iii].
- The actual revenue collected by a State till the end of relevant two months period in any financial year during the transition period will be the actual revenue from State tax collected by the State, net of refunds given by the State; the integrated goods and services tax apportioned to that State, as certified by the Principal Chief Controller of Accounts of the Central Board of Excise and Customs; and any collection of taxes levied by the said State, under the Acts specified in sub-section (4) of section 5, net of refund of such taxes[iv].
- The provisional compensation payable to any State at the end of the relevant two months period in any financial year shall be the difference between the projected revenue till the end of the relevant period and the actual revenue collected by a State in the said period reduced by the provisional compensation paid to a State till the end of the previous two months period in the said financial year during the transition period[v].
In case no compensation is due to be released in any financial year, or any excess amount has been released to a State in the previous year, the State is bound to refund the same to the Centre. Every taxable person making a taxable supply of goods or services or both is bound the pay the Cess and furnish Returns to the Authorities as required. The Cess amounts collected under the Act is to be deposited into the Goods and Services Tax Compensation Fund, which is a part of the public account of India, and all the payments of compensations under s. 7 are to be made from this Fund.
[i] THE GOODS AND SERVICES TAX (COMPENSATION TO STATES) ACT, 2017 NO. 15 OF 2017
[ii] CGST Act (No. 12 of 2017), IGST Act (No.13 of 2017), Union Territory Goods and Services Tax Act 2017 (No. 14 of 2017)
[iii] Supra 1, S. 7 (4), (a)
[iv] Ibid, (b)
[v] Ibid, (c)