THE GOODS AND SERVICES TAX (COMPENSATION TO STATES) BILL, 2017 – AN OVERVIEW

[Mr. M. GOVINDARAJAN]

Constitution amendment

Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 provides that parliament shall, by law, on the recommendations of the Goods and Services Tax Council, provide for 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.

Compensation to States

The Goods and Services Tax (Compensation to States) Bill, 2017 (‘Bill’ for short) provides for the following-

• to provide that the financial year 2015-16 shall be taken as the base year for calculating compensation amount payable to States;
• the revenue to be compensated shall consist of revenues from all taxes levied by the States which are to be subsumed under the GST, as audited by C&AG;
• to provide that the compensation shall be released bi-monthly provisionally and final adjustment shall be done after getting audited accounts of the year from the C&AG;
• to provide that in case of the 11 special category States the revenue foregone on account of exemption of taxes granted by States shall be counted towards the definition of Revenue for the base year 2015 – 16;
• the revenues of States that were not credited to the Consolidated Fund of the States but were directly devolved to ‘mandi’ or ‘municipalities’ would also be included in the definition of ‘revenue subsumed’ if these were collected under the authority of entries 52, 54, 55 and 62 of List II of 7^th Schedule of the Constitution and were subsumed in GST;
• to generate resources to compensate State for 5 years for any loss of revenue suffered by them on account of implementation of GST, a cessshall be levied on such goods, as recommended the Council, over and above the GST on that item;
• the proceeds of GST compensation cess shall be credited to a non lapsable Fund known as the GST Compensation Fund in the Public Account and all amounts payable to the States as GST compensation shall be paid from GST Compensation Fund; and
• any residual amount left in the Compensation Fund after five year compensation period shall be shared equally between the Centre and the States.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 as the share of the Centre and the balances of 50% shall be distributed amongst the States and Union Territories in the ratio of their total revenues from the SGST or UGST, as the case may be, in the last year of the transition period.

Bill

The Bill has been introduced in the Lok Sabha.  The Bill has 14 sections and one schedule.  This Act extends to whole of India.   The bill provides for-

• ascertaining the base year for calculation of compensation;
• calculation of base year revenue;
• projected revenue for any year; and

The bill also proposes to levy GST compensation cess.  The bill provides the procedure of levying the cess, payments, filing returns, refunds etc.,

Transition period

Section 2(r) defines the term ‘transition period’ as a period of five years from the transition date.

Projected growth rate

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

Base year

Section 4 provides that the compensation amount payable in any financial year during the transitional period, the financial year ending 31.03.2016 shall be taken as the base year.

Base year revenue

Section 5 provides the procedure for computation of basic revenue for a State.  Section 5(1) provides that the basic revenue for a State shall be the sum of the revenue collected by the State and the local bodies during the base year on account of the taxes levied by respective State or Union and net of refunds with respect to the following taxed, imposed 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 VII Schedule to the Constitution;
• the CST;
• the 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 to the Constitution;
• the 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 the VII Schedule to the constitution;
• the 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;
• the duties of excise on medicinal and toilet preparation levied by the Union but collected and retained by the concerned State Government under the erstwhile Article 268 of the Constitution;
• any cess or surcharge or fee leviable under entry 66 read with entries 52, 54, 55 and 62 of List II of VII Schedule to the Constitution by the State Government under any Act notified under Section 5(4)

prior to the commencement of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016.

The following taxes are also to be included in the base revenue during the base year-

• on sale of services by Jammu & Kashmir;
• the amount of revenue foregone on account of exemptions or remission given by the State Governments to promote industrial investment with respect to specific taxes referred to in Section 5(1) subject to such conditions as may be prescribed;
• in respect of any State, if any part of revenues are not credited in the Consolidated Fund of the respective state, subject to such conditions as may be prescribed.

The following taxes shall not be included in the calculation of the base year revenue for that State-

• any taxes levied under any Act under erstwhile entry 54 of List II of VII Schedule to the Constitution prior to the Constitution (One Hundred and First  Amendment) Act, 2016 on the sale or purchase of petroleum crude, High speed diesel, motor spirit, natural gas, aviation turbinefuel and alcoholic liquor for human consumption;
• tax levied under CST on the sale or purchase of petroleum crude, High speed diesel, motor spirit, natural gas, aviation turbinefuel 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 turbinefuel and alcoholic liquor for human consumption;
• the entertain tax levied by the State but collected by local bodies under any Act under the erstwhile entry 62 of List II of the VII Schedule to the Constitution, prior to coming into force of the provisions of Constitution (One Hundred and First Amendment) Act, 2016;

Projected revenue for any year

Section 6 provides that the projected revenue for any year in a State shall be calculated by applying the project growth rate over the base revenue for that State.

Calculation of compensation

Section 7(1) provides that the compensation shall be payable to any State during the transition period.  The compensation shall be provisionally calculated and released at the end of every two months period.  The compensation shall be finally calculated for every financial year after the receipt of final revenue figures, as audited by C&AG.  In case any excess amount has been released the excess amount shall be adjusted against the compensation amount payable to such State in the subsequent financial year.

Section 7(3) provides that the total compensation payable shall be calculated in the following manner-

• the projected revenue for any financial year during the transition period;
• the actual revenue calculated by a State in any financial year during the transition period shall be-

• the actual revenue from State tax collected by the State, net of refunds given by the State;
• the IGST apportioned to that State;
• any collection of taxes on account of the taxeslevied by the respective State under the Act, net of refunds of such taxes

as certified by the C&AG;

• the total compensation payable shall be the difference between the projected revenue and the actual revenue calculated by a State.

Section 7(4) provides the method for calculation of the loss of revenue at the end of every two months is as detailed below-

• the projected revenue that could have been earned by the State in absence of GST till the end of the relevant two months shall be calculated on a pro-rata basis as a percentage of total projected revenue for any financial year during the transition period;
• the actual revenue collected by a State till the end of relevant two months period shall be-

• the actual revenue from State tax collected by the State, net of refunds given by the State;
• the IGST apportioned to that State, as certified by the Principal Chief Controller of Accounts of CBEC; and
• any collection taxes levied by the State under the Act, net of refund of such taxes;

• the provisional compensation shall be the difference between the projected revenue till the end or relevant periodand the actual revenue collected reduced by the provisional compensation released till the end of previous two months periods;

Section 7(5) provides that in case of any difference between the final compensation amount payable and the total provisional amount released the same shall be adjusted against release of compensation in the subsequent year.

Section 7(6) provides that where no compensation is due to be released in a financial year, and in case any excess amount has been released to a State in the previous year, this amount shall be refunded by the State to the Central Government.  Such amount is to be credited to the Fund in such manner as may be prescribed.

Cess

Section 8 of the Bill provides for the levy of a cess on such intra-State supplies of goods or services or both and such inter-State supplies of goods or services or both as provided in Section 5 of IGST Act, for the purposes of providing compensation to the State for loss of revenue on implementation of GST with effect from the date from which the provisions of CGST Act is brought into force, for a period of 5 years or for such period as may be prescribed on the recommendation of the Council.  Such levy is not there in case of composition levy under Section 10 of CGST.

The cess shall be levied as specified below, on the basis of value, quantity or on such basis at such rate not exceeding the rate as notified by the Central Government on recommendations of the GST Council-

Sl. No.	Description of supply of goods or services	Tariff item, heading, sub heading, Chapter or supply of goods or services, as the case may be	The maximum rate at which GST compensation cess may be collected
(1)	(2)	(3)	(4)
1	Pan Masala	2109 09 20	135% ad valorem
2	Tobacco and manufactured tobacco substitutes, including tobacco products	24	Rs.4170/- per thousand sticks or 290% ad valorem or a combination thereof, but not exceeding ₹ 4170/- per thousand sticks + ₹ 290% ad valorem
3	Coal, briquettes, ovoids and similar solid fuels manufactured from coal, lignite, whether or not agglomerated excluding jet, peat (including peat litter) whether or not agglomerate	2701, 2702 or 2703	Rs.400/- per tonne
4	Aerated waters	2202 10 10	15% ad valorem
5	Motor cars and other motor vehicles principally designed for the transport of persons (other than motor vehicles for the transport of 10 or more persons, including the driver), including station wagons and racing cars	8703	15% ad valorem
6	Any other supplies		15% ad valorem

Where the cess is chargeable with reference to the value for each supply the value shall be determined under Section 15 of CGST Act for all intra-State and inter-State supplies of goods or services or both.  The cess on goods imported into India shall be levied and collected in accordance to Section 3 of the Customs Tariff Act, 1975 at the point when duties of customs are levied on a value determined under Customs Tariff Act, 1975.

Payments, returns and refunds

Section 9 provides that every taxable person shall-

• pay the amount of cess as payable under this Act in such manner;
• furnish such refunds in such forms, along with the returns to be filed under the CGST Act; and
• apply for refunds of such cess paid in such form

as may be prescribed.

Crediting proceeds of Cess to Fund

Section 10 provides that the proceeds of the cess shall be credited to a non lapsable fund known as the GST Compensation Fund, which shall form part of the public account of India.   It shall be utilized for purposes specified in Section 8.  All amounts payable to the States shall be paid out of the fund. 

Distribution of balance amount

50% of the amount remaining unutilized in the Fund at the end of the transition period shall be transferred to Consolidated Fund of India as the share of Centre and balance 50% shall be distributed amongst the State in the ratio of their total revenue from the State tax or the UGST, as the case may be, in the last year of the transition period.

Audit

The accounts relating to the Fund shall be audited by C&AG of India or any person appointed by him at such intervals as may be specified by him and any expenditure in connection with such audit shall be payable by the Central Government to the C&AG.  The accounts of the Fund together with the audit report shall be laid before each House of Parliament.

Applications of certain provisions of CGST Act

Section 11(1) provides that the provisions of CGST Act 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, mutatis mutandis, apply, in relation to the levy and collection of the cess on the intra-State supply of goods and services.

Applications of certain provisions of IGST Act

Section 11(2) provides that the provisions of IGST Act and the rules made there under, including those relating to assessment, input tax credit, non levy, short levy, interest, appeals, offences and penalties, shall, mutatis and mutandis apply in relation to the levy and collection of the cess on such inter-State supplies.

Input tax credit

The proviso to Section 11 provides that the input tax credit in respect of cess on supply of goods and services leviable shall be utilized only towards payment of said cess on supply of goods and services leviable.

Power to remove difficulties

Section 14 provides that if any difficulty arises in giving effect to the provisions of this Act, the Central Government may, on the recommendations of the Council, by order published in the Official Gazette, make such provisions, not inconsistent with the provisions of the Act, as appear to it to be necessary or expedient for removing the difficulty.  No order shall be under this section after the expiry of three years from the commencement of this Act.