Thread by @accountantvarun

GST Compensation

We are seeing a lot of outrage over GST Compensation issue these days. Let us analyze whats this GST Compensation issue actually is. As we all know, India replaced almost all Indirect Taxes with GST in 2017. Except the tax on Fuel, Alcohol & Customs,..
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... all other Indirect Taxes were replaced with GST. There is uniform rate of GST across India on a particular product or service. As we all know, GST is divided into CGST, SGST/UTGST & IGST. IGST is levied on Interstate trade of goods or provision of services.
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Whereas CGST & SGST/UTGST combined are levied on Intrastate trade of goods or provision of services.
Let us take example of a product/service which charged at 18% GST. If seller and buyer are from different states/UTs, then 18% IGST will be levied which will then be....
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.. distributed amongst Centre and the consuming state/UT in a manner fixed by them in the Constitutional amendment for GST. While in case of transaction within the same state/UT, CGST @ 9% & SGST/UTGST @ 9% will be levied. So, whenever we buy anything, eat at restaurant,..
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...avail any service, etc we can see equal amount of CGST & SGST/UTGST are charged. CGST directly goes into Centre's CFI & SGST/UTGST directly goes into the CFI of respective State/UT. This happens through GSTN Software. States get money directly & not through CG.
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So, parties like Shivsena, NCP etc which make people belive that entire GST is collected by Centre first and then disbursed to states is absolutely false. States/UTs get SGST & their share of IGST directly & not through Centre.

Now, coming to the issue of GST Compensation.
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Since, IGST (GST on Interstate trade) is distributed among Centre & the consuming state (eg if Goods are sold from Karnataka to Odisha, then Odisha gets the share of IGST & not Karnataka), industrial states like MH, GJ, KA, TN started complaining. Because in earlier system,
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.. the producing state used to get the revenue in interstate trade. But in GST, it's the consuming state which gets the revenue. So Producing states are at a loss. That's why Centre assured the states through GST (Compensation to states) Act, 2017 about GST collection.
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Centre protected the revenues of all states with 14% revenue growth till 2022. Suppose, a state was getting Rs 100 from taxes which got subsumed in GST & it collected Rs108 from GST, then Centre will give them Rs 6 as compensation effectively making states revenue Rs 114.
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Suppose in 2nd year after GST, same state collected Rs 116 from GST, then Centre will give them compensation of Rs 13.96 (100*1.14*1.14 - 116). This is how the system of GST Compensation works. States revenue from GST is compared to pre GST revenue from old taxes...
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...as increased by assumption of 14% revenue growth. In order to collect revenue to compensate states, Centre levied GST Compensation cess in addition to basic GST on few luxury items & made provision In law that compensation will be given only out of the Cess collected.
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The compensation amount for 2017-18 & 18-19 was very low. Very few states required centre to compensate them (which means revenue of many states grew at more than 14% in those years). Maharashtra didn't require a single rupee of compensation in 17-18 & very few in 18-19.
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Centre has already released entire compensation till 2019-20. So now, the issue pending is for Apr-June of 2020. Till March 2020, the centre had to compensate only the shortfall in revenue assuming 14% growth (Rs 6 being difference between in Rs 114 & 108 in 1st example)
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But in April-June quarter, due to Covid & Lockdown, the revenue fell sharply. Instead of Rs 116 (GST for 2nd yr), the revenue from GST for state fell sharply to Rs 60. But even Centre's GST Collection fell down by same amount. We pay CGST & SGST together in a single bill.
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So, obviously during lockdown, CGST, SGST & IGST all see a sharp decline. So even Centre's GST Collection is down to Rs 60 from 116. And now the states are expecting Centre to pay following amount as compensation
100*1.14*1.14*1.14 - 60 = Rs 88.15
This is for one state.
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Since, it's 3rd year of GST, hence 14% growth 3 times. So the states are expecting Centre to take entire burden of GST Shortfall. As per above example, earlier Centre had to pay Compensation of say Rs 8, 12, 15 per state. But now, they will have to pay Rs 88 to each state.
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And it's not that Centre had some big gains. Even Centre's GST Collection, Income Tax Collection has reduced. Centre has spent money for various purposes since the start of Covid. They will have to spend on Economic stimulus. They will have to recapitalize Banks.
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It's the Fiscal Position of Centre which affects country's Sovereign ratings. So, shouldn't states manage their affairs in whatever GST they collected & Co-operate with Centre? Centre had promised to compensate loss of Revenue due to shift from Old Tax Laws to GST.
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But the present shortfall in revenue is not due to GST but due to Covid. Legally, Centre is liable to give compensation only to the extent of funds available in Cess Account. But in spite of that, FM is allowing states to borrow more if they carry out certain reforms.
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And even Centre is helping states to repay those borrowings in future. So in the interest of Co-operative Federalism, isn't it the duty of States too to Co-operate with Centre & make an exception for GST Compensation for Apr-June quarter?
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https://twitter.com/accountantvarun/status/1313580588440276992?s=19

@ShekharGupta Check this thread and if you agree with me, then I would request you to make a CTC on this issue.

@IlaPatnaik Mam, I would like to know your opinion on this

@ShamikaRavi Madam, do you agree with my view? Or I made some mistake?

@swarajk224 @freemarketbihar @Me_Predictor