When the goods and services tax was implemented in July 2017, it was proposed that it would increase the price of goods and services tax regime. Along with that, the centre also said that if the states face any revenue loss, which it was assumed the states would, then the centre will provide full guaranteed compensation to the states.

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Filling the revenue gap in GST collection:

In the lockdown when the economy has been badly hit, and the government has announced the extension of paying GST returns in the given period, it is seen that GST collections have worsened in most of the states. GST collections in the month of April have fallen by 80-90 per cent. Delhi, which collected Rs 3,500 crore last year during the same period ended up with Rs. 300 Crore this time. Other states like Tamil Nadu, West Bengal, Andhra Pradesh are not less in any way in terms of suffering losses.

With a decline in states revenue, the states are thus demanding a portion of borrowings from the centre. The decision has been still pending with the GST council, but the government is planning to cover these losses by giving it as borrowings, and then after the end of 5 years it will collect cess from the states.

The other notion that is up for debate is that centre and states are looking towards markets to fill the gap in revenue of states. It is proposed that money would be borrowed from the market and paid to the market after five years.

It is because while states are demanding the cess funds, the centre also does not have adequate funds to give it to states. Due to shortage of funds, the centre has not provided any funds to states since December 2019. With the economy shut down in the lockdown period, the downfall has been significant, and thus a significant step in this direction is the need of the hour.

Understanding about the compensation cess: The compensation cess provided to the states is the gap between the actual revenue collected and the projected revenue. The projected revenue is a growth of 14% in the base year 2015-16. This cess is paid by collecting taxes from certain luxury goods and sin products such as cigarettes, aerated water, automobiles, and coal. However, as the government did not collect the sufficient cess from these items, it has failed to pay it to states since last year.

What has been the government proposal? To ensure that the states are paid full compensation for the losses after the implementation of the new tax regime, the government has proposed to extend the compensation period for five years to reduce the gap of collections in GST collections. The central government pay will in the subsequent years through cess collections.

The decision for this subject is still pending and may be taken by the GST council in some time. It is thus likely that the board will extend the compensation period. Further, as there is a shortage of funds in compensation cess, it is expected that the council will recommend ways to collect the funds and fill the gap in the lack of funds for revenue collection.

Conclusion: The council may also make other decisions like increasing the cess rates of certain luxury products. Further, it may also bring more products under the base cess. It is also expected that the council may also increase the tax rate of certain products to compensate for the losses in revenue collection.