November 3, 2020

GST Compensation Crisis- who’s obligation

Abhinav Kumar, Anushka Singh*

The recent Global Pandemic has forced constitutional scholars and students to once again look deeply into the Federal Structure of the Indian Constitution. The approximate 30,000 crore shortfall in Goods and Services Tax (“GST”) revenue has brought fiscal federalism into question. Recently over the past two months, various states have criticized the Central government’s decision to avoid or renege its responsibility to compensate the state governments for the shortfall due to the Goods and Services Tax.[1] The Ministry of Finance already declared that would not compensate for the revenue shortfall, which it would have paid bimonthly.[2] The government overrode its responsibility by taking refuge to the principle of “Act of God” and hence, leaving the states on their own. The Finance Minister of Kerala, Thomas Isaac, argued that it is the legal and moral obligation of the central government to compensate the state governments for the revenue shortfall.[3]

However, to get into the rights of the states and the responsibility of the central government, it is important to first understand the nuances and the framework of the GST. The GST came into existence via the 101st amendment Act, 2016 (“Amendment Act”).[4] It is a single tax system, due to which all the states as well as the Centre, had to give up their exclusive powers to levy separate taxes. It is a tax where both the Centre and the States can levy a tax on the supply of goods and services. To regulate the taxes between the state and the Centre, and to avoid an impasse, the GST Council was constitutionally set up under Article 279A of the Constitution.[5]

The states and the Centre both have to follow a voting pattern to finalize any recommendation regarding GST. Under the voting pattern, the Centre’s vote shall have a weightage of one-third of the total votes cast, which effectively gives it a veto over all decisions that may be put to the vote before the Council. While the State Governments can also collectively exercise a veto, no individual State Government can exercise a veto over any decision of the GST Council. Thus, the Centre’s veto can reject any proposal, even if it is approved by all the states. This mechanism creates a power hierarchy between the state and Centre which is precisely the reason behind the present compensation crisis.

Now, the foremost reason to compensate the state is that the states agreed to the GST in the first place because they were assured of full compensation from the Centre, for any loss that may arise due to GST. This assurance gained legitimacy by section 18 of the Amendment Act which states that “Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for five years”.[6] However, this section did not bring any amendment to the Constitution to set a framework under which the states would receive compensation. Instead, the Centre enacted a separate GST Compensation to States Act (“Compensation Act”) wherein, section 10(2) states that “All amounts payable to the States under section 7 shall be paid out of the GST Compensation Fund”.[7]

The Centre has taken refuge under the abovementioned section of the Compensation Act, to argue that it has no obligation to compensate the states as the GST Compensation Fund, mentioned in the section, is not sufficient to cover for the loss in revenue due to the pandemic. The Centre contends that, in cases where the Compensation Fund is insufficient to compensate the states, then Centre has no obligation to compensate by tapping into other government funds.

However, the Centre here contradicts its contention laid down by the Ministry of Finance. The paper by MoF states that it is the obligation of the Centre to compensate the states for the revenue shortfall due to GST.[8] And, that the principle of “Act of God” (COVID Pandemic) cannot be invoked in such circumstances. The Former Chairman of the Central Board of Indirect Taxes and Customs, Mr Sumit Dutt Majumdar also stated that the Centre has an obligation to compensate even if there is a shortage in the compensation fund as the Centre can directly borrow from the markets.[9] MoF’s paper also stated that there is no provision in the Amendment Act which exempts the Centre from paying compensation, on account of an ‘Act of God’. This is a mutually contradictory argument as the obligation to compensate for the states is absolute and the Centre cannot renege its legal obligation.

Section 10(2) of the Compensation Act also does not in any way bar the Centre from using its other funds to compensate the states for the revenue shortfall, it only specifies the GST Compensation Fund as a source of payment. Thus, Section 10(2) must be read harmoniously with Section 18 of the Amendment Act that states are entitled to compensation for the loss of revenue, which arises on account of GST implementation.

Additionally, section 10(1) of the Compensation Act also states that the GST Compensation Fund must be tapped from the GST Compensation Cess and any other source with the recommendation of the GST Council.[10] Nevertheless, as mentioned above, due to the Centre’s veto power in the GST council, it has time and again misused this power in case a recommendation is not in its favour. Thus, even if all the states, in accordance with section 10(1) agree to tap into another fund for compensation, the Centre would veto it in order to evade its responsibility. Thus, this veto power, as mentioned above, gives excess power in the hands of the Centre and hence questions the Federal nature of this Act. This design flaw in the GST Council’s voting mechanism has effectively put the States at the mercy of the Centre, and unless the Centre relents, the States have no scope to push an alternative proposal successfully.

Thus, even though the Centre has agreed to disburse 20,000 crores from the Compensation Cess Fund, the impasse over the pending GST compensation continues. For this, the Centre has given the states two option, first, to borrow the money from the market and cover the revenue shortfall. Around 20 states have agreed to the present option. However, other 10 states are still adamant on their stand that the Centre must borrow the funds and pay the states their dues.[11]

Thus, in the absence of any dispute resolution mechanism, or any impartial dispute resolution mechanism, the only remedy that these 10 states can opt for is the Original Jurisdiction of the Supreme Court under Article 131 of the Constitution.[12] Thus, due to just loopholes in the GST mechanisms, the states like Kerala who have already faced devastating floods in past, have to now also manage the pandemic and move to the court to get its right for the compensation from the Centre.

Thus, in order to come out of this impasse, the Centre must realize the constitutional spirit of the GST Amendment Act, and should provide compensation to the states for the shortfall in the revenue. Additionally, as this crisis highlights the flaws in the GST Council’s voting mechanism, a constitutional amendment must be proposed, to limit the veto power of the Centre and put both the Centre and the states on an equal footing in accordance with the spirit of the Amendment Act. Such an amendment is important in similar cases like this, where the states are left at the mercy of the Centre, that too in emergencies, like that of an ongoing Global Pandemic. Otherwise, the states will always be left at the mercy of the gatekeepers in Delhi.

 

*Abhinav Kumar is Research Fellow at CPRG

*Anoushka Singh is a student of NUJS, Kolkata and currently working with CPRG

 

[1] Manpreet Singh Badal, in ‘act of god’, coercive not cooperative federalism, The Hindu, August 29, 2020, available at https://www.thehindu.com/opinion/op-ed/in-act-of-god-coercive-not-cooperative-federalism/article32469299.ece; T M Thomas Issac, Centre’s stance on GST compensation to states is untenable, legally and morally, Indian Express, September 7, 2020, available at https://indianexpress.com/article/opinion/columns/gst-compensation-payments-shortfall-centre-cess-6585749/

[2] Rahul Unnikrishnan, Why States’ Battle for GST Compensation Is More Important Than Ever, The Wire, April 8, 2020, available at https://thewire.in/economy/gst-compensation-states-fiscal-federalism.

[3] T M Thomas Issac, Centre’s stance on GST compensation to states is untenable, legally and morally, Indian Express, September 7, 2020, available at https://indianexpress.com/article/opinion/columns/gst-compensation-payments-shortfall-centre-cess-6585749/.

[4] The Central Goods and Services Tax Act, 2017, Act No. 12.

[5] The Constitution of India, 1950, Art. 279(A).

[6] The Central Goods and Services Tax Act, 2017, Act No. 12, §18.

[7] GST Compensation to States Act, 2017 Act No.15, §10(2).

[8] Ministry of Finance, GST Compensation Options, PIB, August 29, 2020 available at https://static.pib.gov.in/WriteReadData/userfiles/Annexure%20GST%20Options.pdf .

[9] Mannu Arora, GST compensation to states is legal obligation of Centre, not Council: Former Chairman, CBIC, The Economic Times, August 3, 2020, available at https://cfo.economictimes.indiatimes.com/news/gst-compensation-to-states-is-legal-obligation-of-centre-not-council-former-chairman-cbic/77324683.

[10] GST Compensation to States Act, 2017 act No.15, §10(1).

[11] Mahima Kapoor, GST Council Meeting Live: Deadlock Over GST Compensation Continues Between Centre And States, Bloomberg Quint, October 5, 2020 available at https://www.bloombergquint.com/economy-finance/gst-council-meeting-bjp-states-borrowing-option-compensation-cess-finance-minister-live

[12] The Constitution of India, 1950, Art. 131.