Goods & Service Tax & GST Compensation

Context : The Centre paid the entire amount of Goods and Services Tax (GST) compensation due to States up to May 31 by releasing an amount of ₹86,912 crore.

What is GST ?

  • The Goods and Services Tax (GST) is a uniform indirect tax levied on goods and services across the country. GST, as an umbrella tax, replaced central taxes like central excise, service tax, additional duties of excise & customs, special additional duty of customs, besides cesses and surcharges, on supply of goods and services.

Why GST ?

  • Earlier  Central and State Governments leved a large number of taxes such as Central Excise duty, Service Tax, VAT, Purchase Tax, Central Sales Tax, Entry Tax, Local Body Taxes, Octroi, Luxury Tax, etc.  
  • Each of these is an independent tax with separate compliance requirements and differing provisions. This creates complexity and makes it difficult for the taxpayers to adhere to the legal requirements. The different tax systems are also not interconnected, which provides various avenues for tax evasion.
  • To simplify this tax regime, the Goods and Services Tax (GST) wasbe implemented across India from 1st July 2017. 

What is GST Compensation

  • The Constitution (One Hundred and First Amendment) Act, 2016, was the law which created the mechanism for levying a common nationwide Goods and Services Tax (GST).
  • The adoption of GST was made possible by States ceding almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed into the GST.
  • While States would receive the SGST (State GST) component of the GST, and a share of the IGST (integrated GST), it was agreed that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years that is currently set to end in June 2022.
  • This corpus in turn is funded through a compensation cess that is levied on so-called ‘demerit’ goods. The computation of the shortfall is done annually by projecting a revenue assumption based on 14% compounded growth from the base year’s (2015-2016) revenue and calculating the difference between that figure and the actual GST collections in that year.

Benefits of GST

  • Elimination of cascading : GST is collected at every stage of value addition and the credit of tax paid at the previous stage will be available to set off the tax to be paid at the next stage of transaction. This will eliminate cascading of taxes. This, in turn lowers the cost of the goods and services for the consumer.
  • Creation of a common national market: GST broadens the tax base, improve compliance through common and uniform procedures and tax-rates, promote make in India and boost our economy.  GST removes inter-state economic barriers, thereby creating a common national market.
  • Easier compliance : Harmonization of laws, procedures and rates of tax at Centre and State level makes compliance easier and simple. In addition to common forms and formats, GST have a common compliance interface through the GSTN portal. The overall outcomes are reduction in compliance costs, alleviation of the need for multiple record keeping and filing returns for multiple taxes, thereby leading to cost saving for the trade and industry.
  • Boost to Make in India : GST will gives a major boost to the Government of India’s ‘Make in India’ initiative by making goods or services produced or provided in India competitive in the national and international markets.
  • Revenue buoyancy: GST brings buoyancy to the Government Revenue by widening the tax base and improving taxpayer compliance. GST improves India’s ranking in the ‘Ease of Doing Business Index’.
  • Technology-driven tax administration: Administration of GST being largely technology driven will not only expedite decision making, but will also usher in a new era of transparency Under GST, the physical interface between the tax payer and tax administration will be greatly reduced as most of the compliance requirements such as registration, filing of returns, payment of taxes, etc. will be performed online.


GST Network

The GST Network, a not-for-profit, non-government company promoted jointly  by Central and State Governments provides shared IT infrastructure and services to both Central and State governments and also to the tax payers. It provides a uniform interface for taxpayers across India. A robust IT back-bone which enables capture, processing and exchange information amongst   taxpayers, State & Central governments, Banks, RBI and other stakeholders will greatly smoothen the indirect tax administration and boost compliance.

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