EXPLAIN THE PROVISIONS RELATING TO COMPENSATION TO STATES UNDER GST.
GST Compensation Cess is levied by the Goods and Services Tax (Compensation to States) Act 2017. The
object of levying this cess is to compensate the states for the loss of revenue arising due to the
implementation of GST on 1st July 2017 for a period of five years or such period as recommended by
the GST Council.
The Act lays down the mechanism for determining compensation to States for revenue loss due to the
implementation of Goods and Services Tax (GST). Here’s a simplified explanation of the sections:
Section 3: Projected Growth Rate
• Each State’s revenue is expected to grow at 14% per year during the transition period (first five
years of GST implementation).
• This projected growth rate helps determine the amount States would have earned without GST.
Section 4: Base Year
• The base year for calculating revenue compensation is the financial year ending on 31st March
2016.
• The revenue earned by the States during this year forms the benchmark for calculating future
revenue projections and losses.
Section 5: Base Year Revenue
• What is Base Year Revenue?
This is the revenue collected by the States and local bodies during the base year (2015-16) from
taxes that were replaced by GST. It includes taxes like:
o Value Added Tax (VAT) or Sales Tax.
o Central Sales Tax (CST).
o Entry tax, octroi, or local body tax.
o Taxes on luxuries, advertisements, entertainment, betting, gambling, etc.
o Excise duty on medicinal and toilet preparations collected by the States.
o Any cess or surcharge linked to the taxes above.
• Exclusions:
Revenue from the following items is not included in the base year revenue calculation:
o Taxes on petroleum products, alcohol, and aviation fuel.
o Entertainment tax collected by local bodies.
• Special Cases:
o For Jammu and Kashmir, revenue from service tax collected by the State is included.
o Industrially backward States that gave tax exemptions to promote industries can add the
exempted revenue to the base year revenue (with certain conditions).
• Final Calculation:
The base year revenue is finalized based on audited figures verified by the Comptroller and
Auditor General (CAG).
Section 6: Projected Revenue
• What is Projected Revenue?
This is the revenue a State would have earned in any financial year if GST had not been
implemented. It is calculated using the base year revenue and the 14% annual growth rate.
Section 7: Calculation and Release of Compensation
• Who Gets Compensation?
States are compensated if their actual GST revenue falls below the projected revenue during the
transition period (five years from GST implementation).
• How is Compensation Paid?
1. Provisional Payments:
Every two months, a provisional compensation is calculated and paid to the State.
2. Final Payments:
At the end of the financial year, the compensation is recalculated based on final revenue
figures audited by the CAG.
• How is Compensation Calculated?
o The projected revenue for the financial year is determined (as per Section 6).
o The actual revenue collected by the State includes:
State GST revenue (net of refunds).
Integrated GST revenue apportioned to the State.
Other taxes (like those on petroleum) that are still levied by the State.
o Compensation = Projected Revenue - Actual Revenue.
• Adjustments for Overpayments:
If a State receives more compensation than it is entitled to, the excess amount is adjusted against
future payments. If there are no future payments, the State must refund the excess amount to the
Central Government.
Conclusion: This system ensures that States are fairly compensated for revenue loss due to GST, while
maintaining accountability through periodic audits and adjustments.
COMPOSITION LEVY UNDER GST: A PROFESSIONAL INSIGHT
The Composition Levy under the GST framework allows small taxpayers to simplify compliance by paying
tax at a fixed percentage of their turnover, instead of the regular GST rates. This provision is governed by
Section 10 of the CGST Act, 2017, and is subject to specific conditions and restrictions. Below is a
structured explanation:
Key Provisions of Composition Levy
1. Eligibility Criteria:
A registered person with an aggregate turnover in the preceding financial year not exceeding ₹50
lakh may opt for the composition scheme. The government, upon the GST Council's
recommendation, may increase this limit to a maximum of ₹1.5 crore (Section 10(1)).
o Rates of Tax:
▪ 1% for manufacturers.
▪ 2.5% for specified suppliers (e.g., restaurants).
▪ 0.5% for other eligible suppliers.
2. Restrictions on Eligibility:
A registered person is not eligible to opt for the composition scheme if:
o Engaged in inter-State supplies (Section 10(2)(c)).
o Supplies goods through e-commerce operators liable to collect TCS (Section 52).
o Deals in goods or services not taxable under GST.
o Acts as a casual taxable person or a non-resident taxable person (Section 10(2)(f)).
3. Compliance Requirements:
o Tax Collection: A person under the scheme cannot collect GST from customers (Section
10(4)).
o Input Tax Credit (ITC): Not entitled to claim ITC on purchases (Section 10(4)).
o Declaration: A taxpayer must provide accurate information on turnover and comply with any
restrictions imposed by the GST framework.
4. Turnover and Services Exemption: Supply of services is generally prohibited except when the
value of services is up to 10% of turnover or ₹5 lakh, whichever is higher. The value of exempt
services like interest on loans or deposits is excluded from turnover computation.
5. Termination of Scheme: The option lapses once the aggregate turnover exceeds the prescribed limit
during a financial year (Section 10(3)).
6. Penalties for Ineligibility:
If an ineligible person pays tax under this scheme, they are liable to a penalty along with the unpaid
tax. Section 73 or Section 74 will apply for the determination of tax and penalties.
Explanations and Clarifications
• Turnover Computation:
o "Aggregate Turnover" includes taxable supplies, exempt supplies, and exports but excludes
GST and cess.
o Supplies made up to the date of GST registration are included for eligibility computation
(Explanation 1, Section 10).
• Exemptions: Supplies such as deposits, loans, or advances, where consideration is in the form of
interest or discount, are not included in the taxable turnover (Explanation 2, Section 10).
Practical Insights The Composition Levy is aimed at reducing the compliance burden for small businesses
while keeping revenue collections intact. However, businesses must carefully evaluate their eligibility to
avoid penalties and loss of credibility.
Example: A sole proprietor running a restaurant in a single state with an annual turnover of ₹1 crore can opt
for the scheme, paying GST at 2.5% of turnover. However, if they start interstate supplies, they must switch
to the regular tax scheme.
This provision reflects the Indian government's intent to balance simplicity in taxation with revenue needs.
ANTI-PROFITEERING AUTHORITY UNDER GST
The Anti-Profiteering Mechanism under the GST framework aims to ensure that the benefits of tax rate
reductions and input tax credit (ITC) are passed on to consumers. This is governed by Section 171 of the
CGST Act, 2017, read with relevant rules and notifications.
Objective of Anti-Profiteering
The primary objective of this mechanism is to curb any unfair profit-making by businesses due to:
1. Reduction in the rate of GST on goods or services.
2. Availability of ITC under the GST framework.
Businesses must pass these benefits to the end consumer in the form of reduced prices.
Key Provisions under Section 171 of the CGST Act
1. Core Requirement: Any reduction in the GST rate or availability of ITC must result in a
commensurate reduction in the price of goods or services (Section 171(1)).
2. Constitution of Authority: The Act provides for the establishment of an authority to monitor
compliance. This is referred to as the National Anti-Profiteering Authority (NAA).
3. Procedure for Action:
o Initiation of Investigation: Complaints related to anti-profiteering are received by the GST
Council or NAA.
o Directorate General of Anti-Profiteering (DGAP): This body conducts investigations and
submits reports to the NAA.
o NAA Decision: Based on the DGAP's findings, the NAA may issue orders to ensure
compliance.
Powers and Functions of the Anti-Profiteering Authority
1. Functions:
o Determine if the benefits of tax reduction or ITC have been passed on.
o Identify the extent of undue profit retained by businesses.
o Issue directives for corrective actions.
2. Powers:
o Impose penalties on non-compliant businesses.
o Cancel the GST registration of defaulters if deemed necessary.
o Order the recovery of undue profits and direct their refund to affected consumers or deposit
them into the Consumer Welfare Fund.
Mechanism of Enforcement
1. Investigation Process:
o A complaint is filed by a consumer or business stakeholder.
o The DGAP examines documents and data to determine if profiteering occurred.
2. Compliance Measures:
o Businesses found guilty must reduce prices and pay the undue profit with interest.
o In cases where affected consumers cannot be identified, the amount is deposited into the
Consumer Welfare Fund.
Key Points and Clarifications
1. Role of ITC: Businesses must factor in the availability of ITC in their pricing to ensure that
consumers benefit from reduced costs.
2. Applicability: Anti-profiteering applies to both goods and services, irrespective of the business size
or turnover.
3. Time-Bound Action:
o Investigations must be completed within a defined timeframe to ensure swift resolution.
o Businesses have the right to appeal orders issued by the NAA.
Significance of the Anti-Profiteering Mechanism
1. Consumer Protection:
The mechanism safeguards consumers from paying higher prices when tax benefits exist.
2. Market Discipline:
It ensures fair pricing practices across industries, fostering trust in the GST framework.
3. Transparent Governance:
The establishment of a structured investigative authority like the NAA enhances the accountability of
businesses.
Example
If the GST rate on a product drops from 18% to 12%, and the seller retains the same selling price by not
reducing it, this constitutes profiteering. The NAA would investigate and penalize the seller, ensuring the
price reduction is passed on to consumers.
The Anti-Profiteering provisions reflect the Indian government’s intent to create a consumer-friendly
taxation system while maintaining market fairness. Businesses must align their pricing strategies with these
provisions to avoid penalties and ensure compliance.
