The Centre and the states are in a tussle over delayed compensation payments under GST
The Goods and Services Tax (GST), implemented in July 2017, marked a significant change from traditional production-linked tax to consumption-based tax.The new scheme covered State levies such as VAT, sales tax, excise / entry tax together with central levies such as central excise and service tax.States gave up some of their taxation rights in lieu of the Centre passing on their revenue share under GST and also compensating them for potential revenue losses in the first five years.

GST includes a tax levied by the Centre on the intra-state supply of goods and/or services called Central GST (CGST), and a corresponding tax levied by states/UTs called the State GST (SGST/UTGST) on these goods and services. CGST and SGST are levied simultaneously on every purchase of goods and services, except exempted ones. The customer pays the average rate under one of the major tax brackets—5 per cent, 12 per cent, 18 per cent and 28 per cent — in which half accures to the Center and half to the State where consumption occurs.
Integrated GST (IGST) is the GST levied on inter-state transactions and exports/imports of goods and services. IGST is a combination of SGST and CGST and is first levied and administered by the Centre, which then distributes it between the consuming state and itself.
In addition, a compensation cess, ranging from 1 to 200 per cent, is imposed on sin and luxury products such as tobacco, pan masala and other types of vehicles, over and above the topmost slab of 28 per cent.
How is all this work?
Take spoons and forks with a GST of 12 per cent. The consumer will pay 12 per cent on the price of spoons and forks if he or she buys from the manufacturer in the same state (intra-state transaction). Then 6 per cent will be the Center ‘s share as CGST and 6 per cent the State’s share as SGST.
In the case of a wholesale (B2B) trade, the GST allows the seller to claim an input tax credit (ITC) by taking off the tax liability against the tax already paid. For example , a manufacturer in Andhra Pradesh sells spoons and forks to a store in Andhra Pradesh (an intra-state transaction). The owner of the shop pays 12% to the manufacturer. When the customer buys them from his store, She pays 12 per cent of GST at the final price.The shop-owner then takes ITC for the 12 per cent he has already paid and deposits 12 per cent of GST with the authorities, removing the effect of taxation. For the whole purchase, GST of 12% is in effect applied only once after availing ITC.

How did compensation become an issue?
Compensation payments to states began to be delayed since October last year as GST revenues began to slow down. The Covid-19 pandemic widened the gap, with revenue from the GST decreasing by 41% in the April-June quarter.
The Centre released Rs 13,806 crore to the States on July 27 for March 2020, wrapping up the full payout for FY20 at Rs 1,65 lakh crore. Compensation is still pending for the four months of this financial year (April to July).
How is the dispute now placed?
Fresh tensions have resulted after senior Finance Ministry officials are learnt to have reported the Centre’s inability to compensate states in the near future, which was followed by the Attorney General of India’s legal opinion that the Centre does not have an obligation to pay for a revenue shortfall. The AG is learnt to have suggested that the GST Council can recommend to the Centre that it allow the states “to borrow on the strength of the future receipts from the compensation fund” and that the Centre will have to take the “final decision in the matter”.
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