Centre may release Rs 35,000 cr to states as June GST compensation

The Centre may release about Rs 35,000 crore to states as goods and service tax (GST) arrears by September-end, Business Standard has learnt, taking the compensation for the year (FY23) to Rs 1.2 trillion.

“We have so far released Rs 85,000 crore in arrears this year and will soon release around Rs 35,000 crore more for June,” a top government official said.

According to the GST (Compensation to States) Act, states won’t get GST compensation beyond June 2022. However, the compensation cess will continue to be levied on certain items in the 28 per cent bracket till March 2026. This will primarily be used to repay the principal and interest for the Rs 2.69 trillion the Centre borrowed and distributed to states in FY21 and FY22 in lieu of GST compensation shortfall. Tax revenues were hit due to the Covid-19 pandemic.

Just for FY23, the official said, the interest component for the borrowed amount would be around Rs 15,000 crore.

“Out of the Rs 85,000 crore that was cleared earlier this year, only Rs 25,000 crore came from the compensation cess fund. For the rest, the Centre dipped into its own cash balance. So that will have to be replenished,” the official said.

Additionally, once GST refunds are calculated and the Comptroller and Auditor General (CAG) audits the books of the states, whatever pending amount comes up will also have to be distributed to the states to square off their books, the official said. This amount, cumulatively, is not expected to be less than Rs 35,000 crore, the official added.

The bulk of the compensation cess collected will, of course, be used to pay back the borrowed amount and its interest. Whatever is left in the compensation cess fund as of March 2026 will be divided among the Centre and states equally, as mandated by the Act.

GST compensation has remained a sticking point between the Centre and states. After the last GST Council meeting in Chandigarh, Finance Minister Nirmala Sitharaman had said that 16 states had spoken on the compensation issue, cutting across party lines. No decision was taken, however.

Central government officials and most independent experts say that the improved GST receipts mean that GST compensation is unlikely to be extended, as most states will see windfall gains this year.

How states will benefit

• Bulk of cess collected to be used to pay back Rs 2.69 trillion in loan plus interest
• Interest due in FY23 estimated to be around Rs 15,000 crore
• Centre had paid Rs 60,000 crore from its own cash balance to states
• Centre’s public accounts to be replenished
• Further compensation backlog to be cleared after auditing of books