GST Compensation Crisis- who’s obligation
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 criticised the Central government’s decision to avoid or rescind its responsibility to compensate the state governments for the shortfall due to the Goods and Services Tax. The Ministry of Finance already declared that it would not compensate for the revenue shortfall, which it would have paid bimonthly. The government overrode its responsibility by taking refuge to the principle of “Act of God” and hence, leaving the states independently. 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.
However, to get into the rights of the states and the responsibility of the central government, it is important first to understand the nuances and the framework of the GST. The GST came into existence via the 101st amendment Act, 2016 (“Amendment Act”). It is a single tax system, due to which all the states and 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 tariffs between the state and the Centre and avoid an impasse, the GST Council was constitutionally set up under Article 279A of the Constitution.
The states and the Centre both have to follow a voting pattern to finalise 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 all the states approve it. This mechanism creates a power hierarchy between the state and Centre which is precisely why the present compensation crisis.
The foremost reason to compensate the state is that the states agreed to the GST in the first place because they were assured of total 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”. 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”.
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, the 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 the Centre must compensate the states for the revenue shortfall due to GST. 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 must compensate even if there is a shortage in the compensation fund as the Centre can directly borrow from the markets. MoF’s paper also stated that no provision in the Amendment Act 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 rescind its legal commitment.
Section 10(2) of the Compensation Act also does not 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 payment source. 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. 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 agree to tap into another fund for compensation following section 10(1), the Centre would veto it to evade its responsibility. Thus, as mentioned above, this veto power 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. 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 options, first, to borrow the money from the market and cover the revenue shortfall. Around 20 states have agreed to the present option. However, the other ten states are still adamant that the Centre must borrow the funds and pay the states their dues.
Thus, in the absence of any dispute resolution mechanism or any impartial dispute resolution mechanism, the only remedy that these ten states can opt for is the Supreme Court’s Original Jurisdiction under Article 131 of the Constitution. Thus, due to just loopholes in the GST mechanisms, the states like Kerala, which have already faced devastating floods in the past, have to manage the pandemic and move to the court to get its right for compensation from the Centre.
Thus, to come out of this impasse, the Centre must realise the constitutional spirit of the GST Amendment Act and 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 following the spirit of the Amendment Act. Such an amendment is essential 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, Research Fellow at CPRG
Anoushka Singh, CPRG
 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/
 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.
 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/.
 The Central Goods and Services Tax Act, 2017, Act No. 12.
 The Constitution of India, 1950, Art. 279(A).
 The Central Goods and Services Tax Act, 2017, Act No. 12, §18.
 GST Compensation to States Act, 2017 Act No.15, §10(2).
 Ministry of Finance, GST Compensation Options, PIB, August 29, 2020, available at https://static.pib.gov.in/WriteReadData/userfiles/Annexure%20GST%20Options.pdf.
 Mannu Arora, GST compensation to states is the 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.
 GST Compensation to States Act, 2017 act No.15, §10(1).
 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
 The Constitution of India, 1950, Art. 131.