'Nothing is pending': Government releases Rs 2.78 lakh crore GST compensation to states for FY21

The Ministry of Finance on Wednesday said that it has released Rs 2.78 lakh crore GST compensation to the states for the year 2020-21 and "nothing is pending for the year". Further, the Ministry, in a press release, said that the Centre has released Rs 7.35 lakh crore and compensation of Rs 78,704 crore pending only for the year 2021-22. "At the time of the introduction of GST, the Constitution amendment provided that the Parliament, by law shall provide compensation to States for a period of five years for loss of revenue due to introduction of GST," the release stated.

Accordingly, the GST Compensation to States Act was legislated which provides for the release of compensation against 14 per cent year-on-year growth over revenues in 2015-16 from taxes subsumed in GST. This compensation cess is credited to the compensation fund and as per the Act, all compensation is paid out of the fund. Presently, cess is levied on items like pan masala, tobacco, coal and cars. Compensation of about Rs 49,000 crore has been released for 2017-18 from the fund, which increased to Rs 83,000 crore for 2018-19 and further to Rs 1.65 lakh crore in 2019-20. For these three years, almost Rs 3 lakh crore compensation was released to States.

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However, the compensation requirement increased substantially during 2020-21 due to impact of Covid on revenues. To ensure that States have adequate and timely resources to combat Covid and related issues, Centre borrowed Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 and passed it on to States on a back-to-back basis. During 2021-22, Centre ensured that the release of this amount of Rs 1.59 lakh crore was front loaded to ensure that States have adequate resources in the earlier part of the year.

Taking into account this loan, Rs 2.78 lakh crore of compensation has been released to States for the year 2020-21 itself and nothing is pending for the year. Including the assistance released on back-to-back basis, Rs 7.35 lakh crore has been released to States till now and, currently, only for the year 2021-22, compensation of Rs 78,704 crore is pending due to inadequate balance in the fund, which is equivalent to compensation of four months.

Normally, compensation for ten months of April-January of any financial year is released during that year and the compensation of February-March is released only in the next financial year. As explained earlier, compensation of eight out of ten months of 2021-22 has already been released to States. The pending amount will also be released as and when the amount from cess accrues in the compensation fund. 

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