Status Note on GST compensation released to States/UTs

At the time of introduction of GST, the Constitution amendment provided that the Parliament, by law shall provide compensation to States for a period of five years for loss of revenue due to introduction of GST. Accordingly, the GST Compensation to States Act was legislated which provides for release of compensation against 14% year-on-year growth over revenues in 2015-16 from taxes subsumed in GST. This compensation cess is credited to the compensation fund and as per the Act, all compensation is paid out of the fund. Presently, cess is levied on items like pan masala, tobacco, coal and cars.

Compensation of about ₹ 49,000 crore has been released for 2017-18 from the fund, which increased to ₹ 83,000 crore for 2018-19 and further to ₹ 1.65 lakh crore in 2019-20. For these three years, almost ₹ 3 lakh crore compensation was released to States. However, the compensation requirement increased substantially during 2020-21 due to impact of covid on revenues. To ensure that States have adequate and timely resources to combat covid and related issues, Centre borrowed ₹ 1.1 lakh crore in 2020-21 and ₹ 1.59 lakh crore in 2021-22 and passed it on to States on a back-to-back basis. During 2021-22, Centre ensured that release of this amount of ₹ 1.59 lakh crore was front loaded to ensure that States have adequate resources in the earlier part of the year.

Taking into account this loan, ₹ 2.78 lakh crore of compensation has been released to States for the year 2020-21 itself and nothing is pending for the year. Including the assistance released on back-to-back basis, ₹ 7.35 lakh crore has been released to States till now and, currently, only for the year 2021-22, compensation of ₹78,704 crore is pending due to inadequate balance in the fund, which is equivalent to compensation of four months.

Normally, compensation for ten months of April-January of any financial year is released during that year and the compensation of February-March is released only in the next financial year. As explained earlier, compensation of eight out of ten months of 2021-22 has already been released to States. The pending amount will also be released as and when amount from cess accrues in the compensation fund.


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Got unemployment compensation during 2020? Wait to file your federal income tax return

According to Michael Gray, CPA, “Sometimes Congress passes legislation that’s retroactive. This change relates to millions of taxpayers who received unemployment compensation during 2020 and who are dutifully submitting their federal income tax returns. They should wait this year until a new exclusion can be processed.”

While many are excited to receive another federal government stimulus check, those who received unemployment compensation during 2020 should be aware of a tax break in the American Rescue Plan Act of 2021, COVID-19 relief legislation passed in Congress on March 10.

If a taxpayer (same threshold for a single or joint return) has adjusted gross income of less than $150,000, up to $10,200 of unemployment compensation received is excluded from federal taxable income. This exclusion only applies for unemployment compensation received during 2020.

It will probably take at least a week or two for the tax return preparation software providers to incorporate this change in their software. The IRS also has to update its efile processing system to recognize this change.

Unless the IRS changes the April 15 filing date, there is only a little over a month left for this year’s tax filing season. If necessary, you can file for an automatic extension of time to file using IRS Form 4868.

So, if you received unemployment compensation during 2020 and qualify for the exclusion, wait to file your federal income tax return until it can be processed. If necessary, file for an extension of time to file using Form 4868.

What if you already filed your 2020 federal income tax return and you qualified for the exclusion? You can claim the exclusion using the federal amended income tax return form, Form 1040X. You might want to get help from a tax professional for this.

Here is a link to the text of American Rescue Plan Act 2021, H.R. 1319. The unemployment compensation exclusion is at Section 9042.