The GST Tax Sharing Agreement: What You Need to Know
The Goods and Services Tax (GST) is one of the most significant tax reforms in India, introduced on July 1st, 2017. The GST is a single, indirect tax that replaces several indirect taxes such as excise duty, customs duty, central sales tax, and service tax. The GST is levied at every stage of the supply chain, from the manufacturer to the end-consumer.
The GST is divided into two parts: the Central GST (CGST) and the State GST (SGST). The CGST is levied by the Central Government, while the SGST is levied by the State Government. The GST Council, which is chaired by the Union Finance Minister and includes State Finance Ministers, decides the GST rates.
The GST Tax Sharing Agreement, also known as the GST Compensation Cess, is an agreement between the Centre and the States that compensates the States for any revenue losses incurred due to the implementation of the GST. The GST Tax Sharing Agreement was introduced as a temporary measure to bridge the revenue gap for five years until 2022.
The GST Tax Sharing Agreement is funded by the GST Compensation Cess, which is levied on certain goods and services such as luxury cars, tobacco products, and aerated drinks. The GST Compensation Cess is collected by the Central Government and then distributed among the States as per the GST Tax Sharing Agreement. The GST Tax Sharing Agreement ensures that the States receive a revenue guarantee of 14% annually.
In the event that the GST revenue collection falls short of the guaranteed 14%, the States are compensated from the GST Compensation Cess. The GST Council has the authority to determine the compensation amount and the methodology for its distribution among the States. The GST Tax Sharing Agreement provides a safety net for the States, ensuring a stable revenue flow.
The GST Tax Sharing Agreement has been a contentious issue between the Centre and the States. Some States have argued that the Centre has not fulfilled its commitment to compensate them for the revenue losses incurred due to the GST. The Centre, on the other hand, has argued that the revenue shortfall is due to the economic slowdown and has proposed borrowing on behalf of the States to meet the shortfall.
In conclusion, the GST Tax Sharing Agreement is an essential component of the GST structure that ensures a stable revenue flow for the States. The GST Compensation Cess is a crucial source of revenue that compensates the States for any revenue losses incurred due to the implementation of the GST. While there may be disagreements between the Centre and the States on the implementation of the GST Tax Sharing Agreement, it remains a critical part of the GST framework.