Many states likely to seek extension of GST compensation beyond 2022

Several states are expected to raise the issue of extending by five years the compensation period of the Goods and Services Tax (GST) beyond 2022, at the next meeting of the GST Council.
Kerala, Punjab and Chhattisgarh are among those that have said the compensation is inadequate.

They have said that revenue of producing states has been more affected because of the Covid-19 pandemic and sought compensation at the 14% revenue growth level projected on the FY16 base year.

Finance minister Nirmala Sitharaman said on Friday that till 2026 compensation cess will be used to pay for back-to-back loans of ₹2.69 lakh crore during FY21 and FY22, which were given to states to make up for the compensation shortfall.


She said the compensation period to states will end in July 2022 as per law.

As per the constitution amendment carried out to implement GST, states were ensured compensation in lieu of revenue loss on account of the new tax regime for a period of five years, ending July 2022.

The shortfall is calculated assuming a 14% annual growth in GST collections by states over 2015-16 as the base year.

“The matter is not closed… we will take it up for discussion again. There should be an extension of five years, states’ revenues have been hit hard,” Kerala’s finance minister KN Balagopal told ET.

Punjab finance minister Manpreet Singh Badal sought a three-year extension in the compensation period on the grounds that the extended time period would give states more time to make up for the revenue shortfall from compensation, while also recovering from the impact of the pandemic.

“There has been no decision in the Council, there was a discussion in the meeting and many states said that the period should be extended by 3-5 years,” said Chhattisgarh commercial taxes minister TS Singh Deo, noting that the state’s revenue loss has been ₹3,500 crore per year since GST was implemented.

He argued for an extension as several producer states have been unable to meet their budgetary spending requirements due to revenue loss caused by the virus outbreak. “This should be taken into account. Centre cannot take a pre-conceived decision on behalf of states,” he said.

A senior official said some BJP-ruled states had also demanded an extension of the compensation period since the pandemic had impacted the revenue of all states.

“Other options of compensation should also be looked at, such as sharing of the tax base,” an official from Tamil Nadu said.

The Centre made a detailed presentation to states during the GST Council meeting last week, showing the revenue position of the government, increase in GST collections over the past few months and expected increase in collections for the remaining months of the ongoing fiscal year.