Background of GST Compensation Cess :
Presently, Central Sales Tax (CST) is collected by State Government from which goods are supplied. Thus, CST is a production based tax. Since GST is a consumption based tax, the State producing goods will not get tax revenue out of supply of goods. Thus, a big revenue loss is expected to producing States like Maharashtra, Gujarat, Tamil Nadu, Karnataka, Andhra Pradesh, Haryana etc. Consuming States like Bihar, Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Kerala, Orissa will be gainers in GST.
Hence specific provision has been made in Constitution for compensation to producing States for five years.
Section 18 of Constitution Amendment Act effective from 16-9-2016 provides that Parliament shall, on recommendation of GST Council, provide for compensation to States for loss of revenue arising on account of implementation of GST for period upto five years [Note that this section is not part of main Constitution. It is a stand-alone provision].
Goods and Services Tax (Compensation to the States) Act, 2017 [GST Cess Act for short] is to give effect to this provision.
Surcharge on taxes for purpose of Union – Article 271 of Constitution of India (amended w.e.f. 16-9- 2016) provides that Union can levy surcharge on taxes and duties specified in Articles 269 and 270 (i.e. on income tax, excise and CST), which will be retained by Union and will not be distributed among States. This will not include surcharge on GST. Thus, even if Union imposes surcharge on GST, it will have to be shared with States.
This Article is amended w.e.f. 16-9-2016 to provide that this will not include surcharge on GST. Thus, even if Central Government imposes surcharge on GST, it will have to be shared with States.