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What is compensation cess and how will it help govt cuts fiscal deficit?

By Indivjal Dhasmana & Arup Roychoudhury
December 27, 2018 18:31 IST
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The Centre has projected reining in its fiscal deficit at 3.3 per cent of GDP in FY19.

Illustration: Uttam Ghosh/

The Centre will get roughly Rs 20,000 crore (Rs 200 billion) from a corpus not used so far - the excess amount of the compensation cess collected - to help it narrow its fiscal deficit for 2018-19.


The excess amount refers to the kitty after distributing the compensation cess to the states.

Every state’s revenues are estimated to grow by 14 per cent each year on the base of 2015-16, and wherever the growth rate is below that mark, the Centre compensates the states from the cess kitty.

For taking over some portion of the compensation cess, the government got legal backing through an amendment to the GST (Compensation to States) Act in the monsoon session of Parliament.

However, the date of its implementation is yet to be notified, an official said, adding that it was likely to happen by February.

Part 3 of Section 10 of the Act earlier stated that 50 per cent of the amount remaining unutilised in the compensation fund at the end of five years would be transferred to the consolidated fund of India as the Centre’s share, and the balance would be distributed among the states in the ratio of their revenues from the goods and services tax (GST).

That part was amended to say that 50 per cent of the unutilised amount can be transferred to the consolidated fund at any time in any year till the end of the five-year period, when the fund lapses.

The compensation cess is distributed among the states every two months, beginning May.

The excess amount available in the compensation pool was Rs 14,180 crore (Rs 141.8 billion) in 2017-18.

For this year, the excess amount available till October is Rs 25,250 crore (Rs 252.5 billion).

The average monthly collection from the compensation cess comes to Rs 8,000 crore (Rs 80 billion).

If one adds this to the next five months of the current financial year, the collection turns out to be Rs 40,000 crore (Rs 400 billion).

Of this if Rs 25,250 crore (Rs 252.5 billion) is added, the kitty will be Rs 65,250 crore (Rs 652.5 billion).

Also, the chart shows almost 60 per cent of the compensation pool goes to the states for revenue gap and the rest remains as an unutilised amount.

It means that Rs 39,150 crore (Rs 391.5 billion) will be used as compensating cess, leaving Rs 26,100 crore (Rs 261 billion) as the excess amount.

If one adds the Rs 14,180 crore (Rs 141.8 billion) excess amount left in 2017-18 to it, the kitty becomes Rs 40,280 crore (Rs 402.8 billion).

Half this sum - Rs 20,140 crore (Rs 201.4 billion) - will go to the Centre and the other half to the states.

Abhishek Jain, partner at EY, said, “After the amendment is effective, the government could, with the Council's recommendation, distribute the excess GST cess collection between the Centre and the states.”

In the case of excess collection, this distribution would then be additional revenue for the Centre and states, he said.

However, GST collections could come under some pressure due to cuts in the rates of 17 items in December. However, improved compliance, as well as the compensation cess, may offset that.

M S Mani, pattern, Deloitte, said while the recent rate reductions would put pressure on collections in the short term, the experience of the past indicated revenues expanded on account of an increase in the taxpayers base on account of rates being moderate.

“The surplus in the compensation cess account could marginally assist in achieving the collection targets,” Mani said.

The fiscal deficit for April-October has come in at Rs 6.49 trillion, breaching the full-year target of Rs 6.24 trillion.

The Centre has projected reining in its fiscal deficit at 3.3 per cent of GDP in FY19.

Among various heads, the biggest problem might arise in GST collections. It is expected that there could be Rs 70000 crore (Rs 700 billion) to Rs 1 trillion shortfall in the overall GST collections compared to the projections of over Rs 12 trillion for FY19. All of this may not hit the Centre's exchequer alone.

The shortfall is likely to be offset by direct tax collections, the disinvestment proceeds, and now the excess compensation cess.

Besides, there could be some rollover in revenue expenditure, mainly subsidies.

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Indivjal Dhasmana & Arup Roychoudhury in New Delhi
Source: source

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