The Goods and Services Tax (GST) Council has decided to give the Centre a bigger share of the residual GST Compensation Fund. This decision was taken during the Council's 43rd meeting on May 28, 2021, in which several other key decisions were also taken.
The GST Compensation Fund was created as a mechanism to compensate states for any revenue loss arising from the implementation of GST. The fund is financed through a levy of cess on certain luxury and sin goods, and its proceeds are used to compensate states for any GST revenue shortfall below their revenue projections. However, due to the economic slowdown caused by the COVID-19 pandemic, the compensation fund has been facing a severe shortage of funds.
Under the current arrangement, the Centre and the states share the residual GST Compensation Fund in a 50:50 ratio. However, the Centre has been pressing for a higher share of the fund, citing a decline in its own revenue collections due to the pandemic.
Now, in a major policy shift, the GST Council has decided to give the Centre a higher share of the fund. As per the new arrangement, the Centre will receive 62% of the fund, while the states will receive the remaining 38%. This decision is expected to provide some relief to the Centre, which has been struggling to meet its revenue targets in the wake of the pandemic.
The decision to give the Centre a bigger share of the residual GST Compensation Fund is significant for several reasons. Firstly, it marks a departure from the existing arrangement of a 50:50 split between the Centre and the states. This move is likely to cause some resentment among the states, which have been demanding a greater share of the fund in light of their own revenue shortfalls.
Secondly, the decision is expected to ease the Centre's fiscal burden to some extent. The pandemic has severely impacted the Centre's revenue collections, with tax collections falling short of the target by around Rs 2.7 lakh crore in the financial year 2020-21. The higher share of the residual GST Compensation Fund is expected to help the Centre bridge this revenue gap.
Thirdly, the decision is likely to have political implications, given that it comes ahead of several key state elections scheduled for 2022. The opposition parties are likely to use this decision as a tool to mobilize public opinion against the ruling party, which they could accuse of favoring the Centre at the expense of the states.
Apart from the decision to give the Centre a bigger share of the residual GST Compensation Fund, the GST Council also took several other key decisions during its 43rd meeting. These include:
The decision to give the Centre a bigger share of the residual GST Compensation Fund is a significant policy shift that is likely to have far-reaching implications. While it is expected to provide some relief to the Centre, it is also likely to cause some resentment among the states. The decision is also likely to have political implications, given that it comes ahead of several key state elections. The other key decisions taken by the GST Council, such as the exemption of import duty on COVID-19 related goods and the reduction of GST rate on medicines, are expected to provide some relief to the public in the wake of the pandemic.
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