The current tussle between the Centre and States on the issue of GST compensation could be briefly put as follows: While bringing into operation the GST regime, there has been a statutory commitment that the Central Government would compensate the States for any shortfall of revenue over the base level (2015-16) revenue with 14% annual growth of the subsumed taxes and cess/surcharges for a period of five years (2017-18 to 2021-22). The compensation requirement of States in the current fiscal is worked out at Rs 3 lakh crore while the levy of cess provided to compensate the shortfall would yield only Rs 65,000 crore leaving a gap of Rs 2.35 lakh crore.

The Centre has sought to bifurcate the shortfall of Rs 2.35 lakh crore into two parts: Rs 97,000 crore due to GST implementation and the remaining Rs 1.38 crore due to economic contraction as a result of the “act of god! as the Finance Minister puts it referring to the impact of Covid-19. Accordingly, the Centre has offered two options to the States: one, borrow Rs 97,000 crore (shortfall only on account of GST implementation) from special window facility by the RBI. This amount can be fully repaid from the compensation cess fund, without being counted as States! debt. Two, borrow the complete shortfall of Rs 2.35 lakh crore (including Rs 1.38 lakh crore shortfall due to Covid-19-induced economic contraction) from the market. The GST shortfall amount (Rs 97,000 crore) will not be counted as States! debt, while the remaining Rs 1.38 lakh crore will be booked as States! debt. This arrangement will only be for one year and the GST Council will decide afresh about the modalities for next year.

The central Government!s commitment to compensation has a history that begins with the United Progressive Alliance era when many Bharatiya Janata Party-ruled States strongly pitched for a compensation mechanism to be a part of the Constitution itself. Paragraph 92 of the Standing Committee report states that the Centre has assured payment of compensation for a specified period, were there any such loss. This commitment has been incorporated under Clause 19 of in the 122nd amendment of the Constitution (2015) that has empowered the Parliament to enact law, on the recommendation of the GST Council to provide for compensation to the States for loss of revenue arising on account of implementation of the GST up to five years.

Accordingly, Parliament enacted the Goods and Services Tax (Compensation to States) Act, 2017. This Act has provided for cess on intraand inter-State trade of goods and services to be levied for payment of compensation to States. Cess proceeds are to be put in a nonlapsable fund known as Goods and Services Tax Compensation Fund under the Public Account of India. The amount payable to States will be paid from this Fund.

The States being in the forefront of Covid-19 battle have faced great fiscal stress. Their dependence on GST compensation is huge. In 2019-20, GST compensation contributed on an average 24.2% of the protected GST revenues of the States. The share of GST compensation payment in protected revenues is extrapolated for this fiscal at over 50% for 26 out 31 states/UTs. True, the Centre!s finances are also hugely stressed under three challenges: 23.9% contraction of the economy in the first quarter, the Chinese threat on border in addition to Covid-19.

Even so, the Central Government has powers to raise resources through means that are not available to States. Monetary measures including money creation are the monopoly of the Central Government. The Central Government has much wider borrowing power extending to external borrowing. Borrowing is less expensive if it is undertaken by the Central Government.

Yet, the Centre has continually cornered resources that should have been shared with the States. The CAG in its report tabled in Parliament (Monsoon session) has revealed that in violation of the GST Compensation Cess Act, 2017, there was &short crediting to the Fund of GST compensation cess collections totalling to Rs 47,272 crore during 2017-18 and 2018-19′. During 201819 though Rs 95,081 crore was collected as GST compensation cess, the Department of Revenue transferred only Rs 54,725 crore to the Fund and retained the difference in the Consolidated Fund of India and used it for other purposes.

Many States are not in a position to discharge their obligatory duties of paying timely salary and pensions to their employees because of their poor finances. In view of such precarious finances and future interest liabilities, the States are reluctant to borrow and have instead asked the Central Government to borrow.

The Centre has sought to make a distinction between revenue lost due to implementation of the GST and the economic slowdown arising out of the Covid-19 crisis. The Centre!s legal obligation is only to compensate States for losses arising out of the GST implementation. However, the fact is that the current economic contraction is preceded by a downturn of the economy since the demonetization. Thomas Isaac, Kerala

Finance Minister, questioned the Government!s distinction of GST losses as Covid and non-Covid, pointing out that the Constitution makes no such distinction.

The Government cited the Attorney General of India!s opinion to buttress the argument that GST compensation gap cannot be bridged using the Consolidated Fund of India. The counter-argument could be: how could then a part of the GST cess collections be credited to Consolidated Fund of India and used for other purposes?

The States also pointed out that the Centre has not paid the two compensation instalments due for the April-July 2020 period and is using it as a bargaining chip to pressurise the States.

&In the name of “act of God!, a huge debt is being thrust on the States which will destroy their financial health, and federalism will be crushed giving rise to brute power of centralism. We find it totally unacceptable,’ so said Amit Mitra, Finance Minister, West Bengal. The Chief Minister of Maharashtra has even gone to the extent of going back to the pre-GST situation.

To conclude, rolling out GST was a giant step in Centre-State cooperation. Any distrust in the Centre-State relation would leave a trail on future cooperation. The final call to resolve the issue amicably rests with the GST Council.

Source: AssamTribune, 14 October 2020