Definition
GST Compensation to States
GST compensation is the mechanism by which the Centre made good any shortfall in states' revenue caused by the shift to GST during a guaranteed transition period.
States gave up several taxes when GST subsumed them, so they were promised compensation for any shortfall against an assured growth rate of GST revenue for a transition period. The compensation was funded by the GST compensation cess on luxury and sin goods.
The pandemic widened the gap sharply, leading the Centre to arrange borrowing whose servicing extended the cess. The episode strained Centre-state relations and highlighted the importance of the GST Council as the venue for resolving fiscal-federal disputes.
Related terms
- Devolution to StatesDevolution is the constitutionally mandated transfer of a share of the Centre's divisible tax pool to the states, as recommended by the Finance Commission.
- GST Compensation CessThe GST compensation cess is a levy on certain luxury and sin goods used to fund compensation to states for revenue losses arising from the move to GST.
- GST CouncilThe GST Council is the constitutional body that decides the rates, exemptions and rules of GST through consensus between the Centre and the states.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.