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GST Compensation to states

Sat 29 Aug, 2020

Why in News ?

Recently, the 41st Goods and Services Tax (GST) council meeting was held to discuss the issue of compensating states on account of revenue loss due to implementation of GST and fall in cess collections. The Centre acknowledged that states are likely to face a GST revenue gap of ₹3 lakh crore this year, as the economy may contract due to COVID-19.

What is GST compensation ?

  • The GST has been implemented with effect from 01.07.2017 all over India having dual structure i.e. SGST and CGST.
  • As number taxes administered by the State has been subsumed in GST. These taxes were main pillars of the State Revenue, and therefore State were apprehensive that their Revenue may be diminished, there may be shortfall after implementation of GST.
  • To take care of this shortfall a tool named Compensation Cess Fund was devised. Cess is to compensate the state governments that are not getting funds due to implementation of GST. It is collected by central govt and compenstated to state.


  • Union Finance Minister Nirmala Sitharaman described the Covid-19 pandemic-induced economic problems as an "Act of God" amid the GST compensation row between states and the Centre. The Centre has said it is unable to pay GST compensation.
  • Act of God is a loosely referred provision in contract laws that makes a contract void.
  • GST compensation payments to states are pending since April. At the GST Council meeting on Thursday, the Centre suggested two options for borrowing by states to bridge shortfall. 
  • Under the first option, an amount of Rs 97,000 crore or the amount due to the states as GST compensation could be borrowed from the RBI. And, the second option is to borrow the entire amount of revenue shortfall of Rs 2.35 lakh crore. 
  • Under the first option, the GST compensation entitlement to the states will remain intact till 2022. Under the second option, the GST compensation entitlement of the states will be lost.
  • The borrowings from the RBI under both options are to be done and repaid by the states and not the Centre. The loan will be in the name of the states. The Centre will only be a facilitator. The states got seven days at the GST Council meeting to choose how to relieve the Centre of the GST compensation load.