Minister of State for Finance Pankaj Choudhary on July 19, 2021 presented in the Lok Sabha details of the Goods & Services Tax (GST) compensation dues pending to various states. This list showed that the Centre owes states 1.36 lakh crore for 2020-21 and the first quarter of 2021-22.

The list also revealed that of the 31 states and UTs mentioned, five have no pending GST dues in Q1 of 2021-22. These are all north-eastern states — Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim. Moreover, other than Sikkim, the other four states had no GST dues even in 2020-21. No GST dues were released to the five states in 2018-19 and 2019-20, according to the data presented in Lok Sabha in September 2020.

In fact, the total GST compensation dues released to these five states since the implementation of GST (on July 1, 2017) up until February 8, 2021, amounts to Rs 121 crore, which is under 30% of the total compensation released to the state sixth from bottom — Meghalaya which is Rs. 428 crores.

This is because each of these five states do not have a gap in revenue on account of GST implementation, or have a 'nil GST compensation gap'. Before we understand what that means, let's first look into how are GST dues computed.

What is GST compensation & how is it calculated?

GST compensation dues are released every two months to states which face a shortfall in revenue arising from difference in GST collections of the state and the budgeted estimates of a state's revenue for that period.

These budgeted estimates of revenue for the states arise from the provisions in the Goods and Service Tax (Compensation) Act, 2017. Under this, "states are assured of their revenue at 14% compounded growth rate over the base year revenue 2015-16 for loss of revenue arising on account of GST implementation for a period of five years", said Anurag Singh Thakur, former Minister of State for Finance, in the Lok Sabha in September 2021.

This means that until June 30, 2022, states are guaranteed to be compensated bi-monthly for any loss of revenue arising on account of GST implementation. This bi-monthly compensation to states comes from the 'GST Compensation Fund' which is a non-lapsable fund comprising the proceedings of the GST Compensation cess, according to sections 10(1) and 10(2) of the GST (Compensation to state) Act, 2017.

"The GST Compensation cess can be considered a tax on top of the standard GST rates," Sacchidananda Mukherjee, Associate Professor at National Institute of Public Finance and Policy (NIPFP), told FactChecker.

Intra-state supply of goods and services accounts for collection of CGST (the component of GST that goes to the central government) and the SGST/UTGST (component of GST that goes to a particular state/UT government). Meanwhile, inter-state supply of goods and services accounts for the collection of IGST or Integrated GST, a share of which goes to the state government. The GST Compensation Cess is levied on certain luxury items and demerit goods under Section 8 of the GST (Compensation to state) Act, 2017. According to the Central Board of Indirect Taxes and Customs (CBIC), different rates of CGST, SGST/UTGST, IGST, and Compensation Cess rates are applicable on different products.

What does 'nil GST compensation gap' mean?

Having a 'nil compensation gap' can essentially mean two things:

  • The state has had no shortfall in revenue and has achieved its target for revenue collected through GST implementation
  • All the compensation dues to that particular state had been released earlier

"As long as the respective state's revenue [from GST collections] is increasing 14% yearly, there is no compensation needed," Madan Sabnavis, Chief Economist at CARE Ratings, told FactChecker.

According to response Thakur gave in the Lok Sabha, the average GST collection in these five north-eastern states between July 2017 and July 2020 is much lower than the national average.

The states' GST collection is much lower than the national monthly average per state of Rs 1,775.14 crore (this includes all states and UTs except Ladakh which reported GST collections from April 2020).

"GST is a consumption-based tax and smaller estimates indicate lesser consumption of goods and services within these states. For those goods and services which are taxed, these states mainly rely on other states as there is very little production within these states. The economies of each of the five states are relatively much smaller. With most areas being rural or semi-urban, there is a lack of drivers of economic growth, like real estate or transportation," added Sabnavis.

Till March 31, 2021, the five states accounted for just 0.441% of the total registered taxpayers in the country, shows the official website of Goods and Services Tax. The low GST collection average for these states and the low number of registrations can be attributed to a multitude of reasons, but since GST is also a destination-based tax, it's very likely that many goods and services arrive from out of these states, said Mukherjee.

In 2020-21, the five states recorded a monthly average of 9641 inward inter-state suppliers as compared to 674.75 outward inter-state suppliers and 428.25 intra-state suppliers, according to the e-Way Bill Statistics generated and recorded on the Goods and Services Tax website.

An 'e-Way Bill is mandatory for Inter-State movement of goods of consignment value exceeding Rs 50,000 in motorised conveyance and only registered GST taxpayers can register for it.

"Each of these five states have unique terrains, and it is possible that a large number of goods and services in the particular state are offered by few dealers — unlike larger metropolitan areas like Chennai and Delhi, where there are multiple dealers for a single product or service," explained Mukherjee.

Although four (except Arunachal Pradesh) of the five states did have pending GST compensation dues amounting to a total of Rs 155 crore for the period of April-July 2020, but that's because these were the first few months of the lockdown imposed due to the COVID-19 pandemic, according to data presented in the Lok Sabha on September 19,2020. However, due to inadequate balance in the GST Compensation Fund, states were presented with two borrowing options.

All the five concerned states chose to opt for the additional borrowing permission equivalent to 0.5% of Gross States Domestic Product (GSDP), and did not chose to raise funds through the special borrowing window opened by the Government in October 2020 to meet the estimated shortfall of Rs 1.1 lakh crore in GST Compensation dues to all states/UTs. This way they became the only states in the country not urging the Centre now and again for compensation of tax shortfall.

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