Six years of GST: Compensation cess still needs to be sorted out
GST) marked its sixth anniversary. I wrote a five-year review last year (Mint, 1 July 2022), commending its compliance simplification after a bad start. I also strongly proposed universal access to the Reverse Charge Mechanism (RCM) to help resurrect informal manufacturing and services.
An explicitly permissible feature in the Central GST Act, a universal RCM was ruled out by notification soon thereafter, essentially destroying unregistered small-scale activity. My call has sadly gone unheeded. The fifth anniversary last year also marked the end of the five years over which, under the GST Compensation Act of 2017, the Central government underwrote a 14% yearly increase in GST revenue for every state, starting from the yield in 2015-16 of state taxes replaced by the GST.
I have written elsewhere on why guaranteeing a uniform 14% annual increase was not equitable across states, and will not deal with that issue here. There has been greater revenue vigilance by states post-compensation. Service providers with a presence in multiple states should have seen this coming, but apparently did not.
GST compensation was funded by a cess leviable on specified goods listed in a schedule to the 2017 Act—principally tobacco, coal-based solid fuels and fossil-fuelled motor vehicles (but open-ended to include “any other supplies"). It was quite an extraordinary statutory commitment to a revenue top-up that could not be projected with any accuracy. Then there was the pandemic, when the compensation required soared even as cess collections dived.
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