Economics Prelims 2021 Prelims cum Mains

GST compensation cess to stay beyond June ’22 to help states

In the Syllabus

General Studies Paper III : Economics
Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Inclusive growth and issues arising from it.
Government Budgeting.

In News

  • The differences over shortfall in compensation cess, between states and the Centre remained unresolved at the recently held 42nd Goods and Services Tax Council meeting.
  • However, the Centre has decided to release Rs 45,000 crore of GST dues to States by next week to help them meet immediate spending needs amid the pandemic.

About: Compensation Cess under GST

  • Under GST, a compensation cess — ranging from 1-200% — is imposed on sin and luxury goods like cigarettes, pan masala and certain categories of automobiles, over and above the topmost slab of 28%.
  • For example, SUV vehicles (more than 4 metres) are charged 50 per cent GST, of which the GST tax rate is 28 per cent and the compensation cess is 22 per cent.
  • Sin goods are goods which are considered harmful to society.

Reasons for introducing the compensation cess:

  • Compensation cess was introduced to compensate States for the loss in their revenue due to the implementation of GST.
  • Thus, the GST (Compensation to States) Act guarantees all states an annual growth rate of 14 per cent in their GST revenue in the first five years of implementation of GST beginning July 2017.
  • If a state’s revenue grows slower than 14 per cent, it is supposed to be compensated by the Centre using the funds collected as compensation cess.

Recent issues with compensation cess:

  • In the recent past, the issue of compensation cess has led to differences between the Centre and states, as states have not been paid their promised compensation since the last fiscal year.
  • As per the Centre, due to the slowdown in economy, the collection of money through compensation cess has reduced significantly.
  • While compensation cess collections this year are expected to be just around Rs 65,000 crore, compensation due to States is around Rs 3 lakh crore. Thus, the states are facing a Rs 2.35 lakh crore revenue shortfall.
  • Of this, as per Centre’s calculation, about Rs 97,000 crore is on account of GST implementation and rest Rs 1.38 lakh crore is the impact of COVID-19 on states’ revenues.
  • To address this shortfall, the Centre in August gave two borrowing options to the states: to borrow either Rs 97,000 crore from a special window facilitated by the RBI or Rs 2.35 lakh crore from market.

Highlights of the recent GST Council meeting

Revised breakup:

  • At the recent meeting, the centre has revised the breakup and said that Rs 1.10 lakh crore (earlier calculated as Rs 97,000 crore) of the shortfall is due to GST implementation and the balance due to COVID-19.
  • Following this revision, under the first borrowing option, States can now borrow Rs 1.1 lakh crore.
  • The second option continues to remain the same, where States can borrow the entire Rs 2.35 lakh crore shortfall.

Stand taken by various states:

  • Around 21 states, have opted to borrow Rs 97,000 crore to meet the GST revenue shortfall in the current fiscal.
  • However, 10 states demand that full compensation should be paid to the states during the current year and the centre should borrow the amount.

Extension of Compensation Cess:

  • The Council has agreed to extend the levy of compensation cess under the GST regime, beyond the five-year period. It was originally planned that the compensation cess would be levied till, June 2022.
  • The cess collections will be used to repay borrowings to be made this year for meeting the compensation shortfall.

Aadhaar authentication for refunds:

  • Based on investigations of cases where taxpayers disappeared after claiming GST refunds, the Council has decided to restrict refunds to bank accounts validated by Aadhaar.
  • It also made Aadhaar authentication mandatory for all refund applications.

Declaration of HSN Code:

  • The Council approved the revised requirement of declaring HSN (Harmonised System of Nomenclature) Code for goods in invoices and in sales return form, with effect from April 1, 2021.
  • Taxpayers with a turnover of over Rs 5 crore will have to quote the six-digit HSN, while those up to Rs 5 crore will have to quote up to four digits for business to business (B2B) supplies of goods and services.

Miscellaneous decisions:

  • On the procedural front, the Council approved some changes so that the number of returns to be filed by smaller businesses are reduced from 24 to 8, starting January 1, 2021.
  • The Council also decided to exempt 18% GST levied on satellite launch services offered by ISRO, Antrix Corporation Ltd and NewSpace India Limited (NSIL).
  • This is being done to encourage start-ups that are making satellites to use domestic launching services instead of foreign players.

Future outlook:

  • The Council agreed to meet again on October 12 to resolve the borrowing issue with the states.

About: HSN Code

  • The Harmonised System Nomenclature, or HSN is a six-digit identification code developed by the World Customs Organization (WCO).
  • Over 200 countries use the system as a basis for their customs tariffs, gathering international trade statistics, making trade policies, and for monitoring goods.
  • The system helps in harmonising of customs and trade procedures, thus reducing costs in international trade.
  • The system currently comprises of around 5,000 commodity groups, each identified by a unique six-digit code. Of the six digits, the first two denote the HS Chapter, the next two give the HS heading, and the last two give the HS subheading.
  • The HSN code for pineapple, for example, is 0804.30, which means it belongs to Chapter 08 (Edible fruit & nuts, peel of citrus/melons), Heading 04 (Dates, figs, pineapples, avocados, etc. fresh or dried), and Subheading 30 (Pineapples).

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