The Central government is looking at paying GST compensation to states using a portion of its borrowings and repaying it by collecting cess in the sixth or further subsequent years.
Under the GST law, states are guaranteed full compensation for any revenue loss for the first five years after the introduction of the goods and services tax (GST) in July 2017.
The compensation is a gap between actual revenue collected and projected revenue. The projected revenue is revenue growth of 14 per cent for states per year over base year 2015-16.
As per the GST Act, full compensation to the states has to be paid for a period of five years till FY22 only through the compensation fund that gets its funds through a levy of GST compensation cess on few items. However, with funds not getting enough collections since August 2019, the GST compensation to states have been delayed with Centre now looking at getting the GST Council nod for extending the levy of compensation cess at least a couple of years beyond the cut-off fifth year to make good the gap in cess collection actual compensation payment to states.
“This (extending the duration of GST compensation cess) has been discussed in the past to ensure states are paid full compensation for any loss of revenue in first five years of the implementation of the new indirect tax regime while the Centre repays its liabilities through cess collections in subsequent years. The GST Council may explore the option again at its next meeting,” government sources privy to the development said.