The GST compensation was the mechanism to suitably compensate states for loss of revenue arising out of implementation of the GST. The compensation mechanism was a unique feature that remained up to five years from the date of implementation of GST.
Constitutional position
- The nation-wide GST was levied based on the Constitution (One Hundred and First Amendment) Act, 2016.
- The constitutional law also contained a provision for compensation that had to be given to states to adjust to the shortfall with 14% growth annually.
- Revenue shortfall It was believed the states would endure a revenue shortfall if they gave up their rights to impose local-level indirect taxes. This was adjusted in form of compensation.
- Temporary stopgap The arrangement was to be stopgap until states government found out new avenues for raising revenue. It would not continue beyond five years.
- The funds for GST compensation were raised through a compensation cess levied on so-called ‘demerit’ goods.
- This includes goods such as pan masala, tobacco, aerated waters and motor cars apart from coal.