GST Compensation from Union to State Vishu Raj BASICS OF LAW Fri, Aug 28, 2020, at ,09:33 PM Introduction of Good and Service Tax Goods and Services Tax is a destination-based, multi-stage, comprehensive tax levied at each stage of value addition. Having replaced multiple indirect taxes in the country, it has successfully helped the Indian Government achieve its ‘One Nation One Tax’ agenda. The tax is levied on goods and services sold within India’s domestic boundary for consumption. Implemented by a majority of nations worldwide with respective customizations, the tax has been successful in simplifying the indirect taxation structure of India. India established a dual GST structure in 2017, which was the biggest reform in the country's tax structure in decades. The main objective of incorporating the GST was to eliminate a tax on tax, or double taxation, which cascades from the manufacturing level to the consumption level. The Bill provides for compensation to states for any loss in revenue due to the implementation of GST. Components of Goods and Services Tax Goods and Services Tax comprises three components applicable, basis the centre, the state, and integrated levy. They are – CGST – Central Goods and Services Tax is collected by the central government on sales conducted intra-state. SGST – State Goods and Services Tax is collected by the state government on the sale of goods and services within a particular state as well. IGST – The central government collects Integrated Goods and Services Tax on sales affected inter-state. The collection of tax is thus undertaken in the following way for intra-state and inter-state transactions. GST Levy and Revenue Share Intra-State Sale Inter-State Sale Goods and Services Tax SGST+CGST IGST Share of Revenue Revenue collected to be shared between state and central government equally. Revenue collected by the central government. It will then be shared as per the goods’ destination. Compensation cess in GST Goods and Services Tax (Compensation to States) Act, 2017 was enacted to levy Compensation cess for providing compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force (01/07/2017), for five years or such period as may be prescribed on the recommendations of the GST Council. The compensation cess on goods imported into India shall be levied and collected by the provisions of section 3 of the Customs Tariff Act, 1975, at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962, on a value determined under the Customs Tariff Act, 1975. The cess will compensate the states for any revenue loss on account of the implementation of GST. This cess will not be payable by exporters and those persons who have opted for compensation levy. The input tax credit of this cess can be only used to pay compensation cess and not the other taxes like CGST, SGCT, or IGST. Laws and Rules applicable: The provisions of the Central Goods and Services Tax Act, 2017 and the Rules made thereunder, including those relating to assessment, input tax credit, non-levy, short-levy, interest, appeals, offences, and penalties, shall apply about the levy and collection of the cess on the intra-State supply of goods and services. Similarly, in the case of inter-State supplies, the provisions of the Integrated Goods and Services Tax Act and the Rules made thereunder will apply. Period of compensation: - Compensation will be provided to a state for five years from the date on which the state brings its State GST Act into force. Base year revenue: The base year tax revenue consists of the states’ tax revenues from (i) state Value Added Tax (VAT), (ii) central sales tax, (iii) entry tax, local body tax, (iv) taxes on luxuries, (v) taxes on advertisements, etc. However, any revenue among these taxes arising related to supply of (I) alcohol for human consumption, and (ii) certain petroleum products, will not be accounted as part of the base year revenue