Draft on GST Compensation Bill

By Registrationwala

2nd April 2017


GST is undoubtedly the most awaited reform in Indian Constitution. This bill also brings about a provision of compensation of losses incurred by the states for loss of revenue due to its implementation. According to the draft of (Compensation To The States For Loss Of Revenue) Bill, states will be readily compensated for a period of five years for any form of losses that are resultant of transition to this new tax system. This is applicable to the whole of India, and is not restricted to one particular state. This bill will be commenced as soon as the central government approves of it by notifying it with an official statement.

This Act will be proposed (titled) as Goods and Services Tax (Compensation to the States for Loss of Revenue) Act, 2016.

On what basis will the compensation be calculated?

In order to ensure uniformity and a transparent compensation system, the base year for calculating the compensation will be 2015-2016. The base year shall have the meaning assigned to it in section 4.  The base revenue meaning will be assigned in section 5. The base revenue year entails

(i) State Value Added Tax (VAT),

(ii) Central Sales Tax,

(iii) Entry Tax, Octroi, Local Body Tax,

(iv) Taxes on Luxuries,

(v) Taxes on Advertisements, etc.

There are a few exemption on repeated supply of  Alcohol for Human consumption,  Certain Petroleum products, do not make it to the base year revenue accounts.

To begin with 14% of all states growth rate will be assumed in order to calculate the revenue of the states and its deficit caused by the transition to GST. Based on this rate the compensation will be calculated and paid at regular intervals i.e quarterly.

Apart from taxes such as Value added taxes, luxury tax, entertainment tax and other indirect taxes, this taxable base is set to include 2% of the revenue from the central sales tax.

While calculating compensation for North Eastern states that falls under the special category, will be compensated with the revenue that was given away on the basis of exemption will now be included as a part of the compensation.

Cess will be implied on supply of certain goods and services under GST council. This Cess will henceforth be titled as the GST Compensation Cess. This Cess was recommended by the GST council, the receipts should be deposited or acknowledged in GST Compensation Fund. These receipts will act as an acknowledgement for providing compensations due to the implementation of GST.

Way forward

Moving forward, once the compensation period is over the GST council has proposed that 50% of the unutilized funds that’s accumulated in the GST Compensation Fund will be deposited to the consolidated Fund of India. This fund will be distributed between the centre and the states in the ratio of the formula of the fourteenth finance commission.

The latter part of the 50% will be shared by the states as per the ratio of their total revenues incurred from SGST during the last year of the transition period.

This draft also lays down the process of conducting CGST and SGST and its method of being levied and collected.  It also looks into the process of resolving disputes between the states and the central government. The process regarding registration and refunds are also called out in the draft. This draft also mentions that the central government has the power to create a new authority or use its power to reduce the tax rates of certain items that are supplied to the consumers in through them. This authority or the governing body can also impose penalty if lower tax are not being passed on to the consumers.

E-commerce companies will still pay 1% tax that will be collected at the source, this provision is retained by the proposed draft. After collecting this amount from the supplier the E commerce company is expected to file respective returns.

All is not well with the draft, as this law expects the service tax assesses to register in every state they operate. By doing so, it will in return increase its compliance requirements. Sectors such as telecom, banking and insurance companies strongly oppose this provision.

Export of goods and services and supply of goods and services to a special economic zone will be classified as zero rated supply. The draft makes a provision of a situation in which the tax on input supplies shall be treated as NIL.



Draft on GST Compensation Bill