Context: Many states have demanded that the GST compensation cess regime be extended for another five years. Also, states have demanded that the share of the Union government in the centrally-sponsored schemes should be raised.
Key Concerns of States

• Revenue Shortfall: The state’s GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore.
• Economic Slowdown: At a time when growth is faltering, the delays in paying compensation to states as guaranteed by the GST Act will make it more difficult for them to meet their own finances.
• Decreasing Centre Devolution: Most states are of the view that the Centre’s share in centrally-sponsored schemes has gradually reduced and states' share has increased. Due to this, their most significant demand is increasing share in centrally-sponsored schemes.

About GST Compensation

• The Constitution (101 Amendment) Act, 2016, was the law which created the mechanism for levying a nationwide GST.
• There is a provision in this law to compensate the States for loss of revenue arising out of implementation of the GST.
• GST (Compensation to States) Act, 2017 guarantees all states an annual growth rate of 14% in their GST revenue during the period July 2017- June 2022.
• If a state’s GST revenue grows slower than 14%, such ‘loss of revenue’ is taken care of by the Centre by providing GST compensation grants to the state.
• For that, a non-lapsable Fund known as ‘GST Compensation Fund’ which forms part of the Public Account of India, was created.
• GST compensation cess is levied on different lavish and addictive goods and services for that purpose. It includes tobacco products, vehicles above 1500 cc capacity, etc.

Note: Cess is a tax on tax.
Compensation Cess

• States are guaranteed compensation for any revenue shortfall below 14% growth (base year 2015-16) for the first five years ending 2022.
• GST compensation is paid out of Compensation Cess every two months by the Centre to states.
• The compensation cess was specified by the GST (Compensation to States) Act, 2017.
• All the taxpayers, except those who export specific notified goods and those who have opted for GST composition scheme, are liable to collect and remit the GST compensation cess to the central government.
• Compensation Cess Fund: The GST Act states that the cess collected and the amount as may be recommended by the GST Council would be credited to the fund.

About Goods and Services Tax

• GST is an indirect tax that is applied to goods and/or services throughout India, uniformly, making India One Market.
• GST replaced, existing tax regime of Value Added Tax(under control of the state) and Service Tax(under control of the center).
• Currently, the prevailing GST rates are @5%, @12%, @18%, & @28%.

The total rate of GST is distributed in 3 heads

• Central Goods and Services Tax (CGST): Tax money goes to the center.
• State Goods and Services Tax(SGST): Tax money goes to the state.
• Integrated Goods and Services Tax(IGST): Tax money distributed in State and center as per the recommendation of GST council.