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GST COMPENSATION CESS

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GST COMPENSATION CESS
Mr. M. GOVINDARAJAN By: Mr. M. GOVINDARAJAN
December 1, 2016
All Articles by: Mr. M. GOVINDARAJAN       View Profile
  • Contents

In order to compensate the States for the introduction of Goods and Service Tax regime, the Central Government proposed to levy a new cess called as ‘GST Compensation Cess’ through the Goods and Services Tax (Compensation to the States for loss of Revenue) Bill, 2016.  The Government proposes to introduce the said bill in the winter session of Parliament and it may be introduced in the first week of December, 2016.

The said bill extends to the whole of India.   It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint in this behalf.

GST Compensation Cess

Section 8 of the bill provides for the levy and collection of GST compensation cess (‘cess’ for short).  The said section provides that there shall be levied and collected in accordance with the provisions of this Act, a cess to be called the ‘GST Compensation Cess’.  The rate of this cess will be determined by means of Notification.  The ceiling limit for this cess will also be prescribed.  The cess will be levied on the value determined under Section 15 of Model GST law.  Section 15 deals the value of taxable supply.  The Cess will also cover on the supplies on which tax is payable on reverse charge basis.  The rate of cess may be prescribed on the recommendations of the Council.  The levy of cess is for the purpose of providing compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years, with effect from the date from which the CGST Act is brought into force.  This Cess will not be applicable on supplies made by a taxable person permitted to opt for composition levy under Section 8 of the Model GST law.

Payment, returns and refunds

Section 9 provides that every taxable person registered under the Model GST law, making a taxable supply of goods and/or services, shall furnish such returns in such formats, as may be prescribed, along with the returns to be filed under the Model GST law.  The taxable person shall pay the amount payable under the Act in the manner as may be prescribed.  Refund of Cess paid may be applied in prescribed form.  For the purposes of cess, all the provisions, except for the format to be filed, of the Model GST law and the rules made there under shall apply in relation to the levy and collection of the cess.

Section 11(1) provides that the provisions of CGST and the rules made there under including those relating to assessment, input tax credit, non levy, short levy, interest, appeals, offences and penalties shall apply mutatis mutandis in relation to the levy and collection of the cess leviable as they apply in relation to the levy and collection of Model law.

Section 11(2) provides that the provisions of IGST Act, 2016 and the rules made there under including those relating to assessment, input tax credit, non levy, short levy, interest, appeals, offences and penalties, shall, as far as may be apply in relation to the levy and collection of the cess on the inter-state supply as they apply in relation to the levy and collection of IGST.

GST Compensation Fund

Section 10 provides that the proceeds of the GST Compensation Cess shall be credited to a non lapsable fund known as the GST Commission Fund in the Public Account and shall be utilized for making compensation to the States for their loss in revenue.  All amounts payable to the States shall be paid from the GST Compensation Fund.

Procedure for payment of compensation

1. The Bill is to decide the base year for calculating the compensation amount.  Section 4 provides that for the purpose of calculating the compensation amount payable in any financial year during the transition period, the financial year ending 31st March, 2016 will be taken as the base year.

2. Section 2(18) defines that the ‘transition period’ means a period of five years from the transition date, i.e., 01.04.2017 (a probable date).

3. Section 3 provides the projected growth rate of the State.  This section provides that the projected nominal growth rate of revenue subsumed for a State during the transition period shall be 14% per annum.

4. Section 5 provides the calculation of the base year Revenue of a State, i.e., 2015 – 16.  The base year revenue of a State shall be the sum of the revenue collected by the State and local bodies during the base year on account of the taxes levied net of refunds with respect to the following taxes imposed by the respective State or Centre, which are subsumed into GST-

  • VAT, sales tax, purchase tax, tax collected on works contract or any other tax levied by the concerned State under the erstwhile Entry 54 of List II of the VII  Schedule to the Constitution, prior the Constitution (101st Amendment) Act, 2016 (‘amendment’ for short);
  • Entry tax, octroi, local body tax or any other tax levied by the concerned State under the erstwhile Entry 52 of List II of the VII Schedule prior to amendment;
  • Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling or any other tax levied by the concerned State under the erstwhile Entry 62 of List II of VII Schedule prior to amendment;
  • Taxes on advertisement or any other tax levied by the concerned State under the erstwhile Entry 55 of List II of the VII Schedule to the Constitution, prior to amendment;
  • Duties of excise on medicinal and toilet preparations levied by the Union but collected and retained by the concerned State under the erstwhile Article 268 of the Constitution, prior to amendment;
  • Any cess or surcharge levied by the State Government under any Act which is included in the definition of ‘earlier laws’;
  • In respect of Jammu & Kashmir, the base revenue shall include the amount of service tax collected by the State Government;
  • In respect of States mentioned in Article 279A(4)(g) of the Constitution, the amount of revenue forgone on account of exemptions given by the State Government to specific entities under the laws to promote industrial investment would be included in the total base year revenue of the State, subject to the conditions as may be prescribed;
  • In respect of any State, if any part of revenue are not credited in the Consolidated Fund of the respective State, the same shall be included in the total base year revenue of the State, subject to the conditions as may be prescribed.

5. Section 5(3) provides that the following shall not be included in the calculation of the base revenue for the State-

  • Any taxes levied under the erstwhile Entry 54 of List II of the VII Schedule prior to amendment on the sale or purchase of petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption;
  • Any taxes levied under CST on the sale or purchase of petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption;
  • Any cess imposed by the State Government on the sale or purchase of petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption;
  • Entertainment tax levied by the State but collected by local bodies, under any Act enacted under the erstwhile Entry 62 of List II of VII Scheduleprior to amendment.

6.  The base year revenue as calculated by the State shall be got audited by the Comptroller and Auditor General of India (‘C&AG’ for short).

7.  Section 6 provides for the calculation of projected revenue for any year.  This section provides that the projected revenue for any year in a State shall be calculated by applying the projected growth rate over the base year revenue of that State.

8.  Section 7 provides the method of calculation and release of compensation.  Section 7(1) provides that the GST compensation payable to a State shall be provisionally calculated and released at the end of every quarter and finally calculated for every financial year after receipt of the final figure, as audited by C&AG.  In case of excess amount has been released in any financial year during the transaction period, the excess amount shall be adjusted against the compensation payable in the subsequent financial year.

9.  Section 7(2) provides that the total GST compensation payable shall be calculated as detailed below-

  • The projected revenue for any financial year during the transition period, that have accrued to a State shall be calculated;
  • The actual revenue collectedby a State in any financial year during the transition period net of refunds and the IGST apportioned to that State as certified by C&AG;
  • Total GST compensation payable in any financial year shall be the difference between the projected revenue and the actual revenue collected by the State.

10. Section 7(3) provides that the loss of revenue at the end of any quarter shall be calculated at the end of every quarter as detailed below-

  • The projected revenue till the end of the relevant quarter would be calculated on a pro rate basis as a percentage of the total projected revenue;
  • The actual revenue collected by a State till the end of the relevant quarter net of refunds;
  • The provisional GST compensation payable at the end of the relevant quarter shall be the difference between the projected revenue and the actual revenue collected by a State in the said period reduced by the provisional GST compensation paid till the end of the previous quarter.

11. Section 7(4) provides that in case of any difference between the final GST compensation amount payable to a State and the total provisional GST compensation amount released to a State in the said financial year, the same shall be adjusted against the release of GST compensation in the subsequent financial year.

12. Section 7(5) provides that where no compensation is due to be released in any financial year and in case any excess amount has been released in the previous year, the amount shall be refunded by the State to the Central Government and such amount shall be credited to the GST Compensation Fund.

Disposal of GST Compensation Fund

Section10(3) provides the procedure for the disposal of balance of amount in the GST Compensation Fund after the transition period is over and after compensating all the States for the transition period.  According to this Section 50% of the amount remaining unutilized in the GST Compensation Fund at the end of the transition period shall be transferred to the Consolidated Fund of India and shall be distributed between the Centre and the State and amongst the States as per provisions of Article 270(2) of the Constitution.  The balance 50% shall be distributed amongst the States in the ratio of their total revenues from SGST in the last year of the transition period.

 

By: Mr. M. GOVINDARAJAN - December 1, 2016

 

Discussions to this article

 

The Compensation cess is over and above IGST , CGST & SGST . It was said that there would be single rate in place of various tax rates that we have now in this tax regime. But now it seems that in place of number of taxes which got subsumed into GST , new cesses are proposed. The working capital and compliance part is going to be challenged . Thanks

Mr. M. GOVINDARAJAN By: Ganeshan Kalyani
Dated: December 1, 2016

 

 

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