The Centre has reneged on its promise to compensate States for revenue loss suffered as a result of switching over to the GST. The GST compensation to States has been due since April 2020. As per the GST Compensation Act, the Centre is mandated to compensate States for loss of revenue on account of implementation of the GST for a period of five years i.e. until 2022. The stipulation in the Act states that the compensation should be provisionally calculated and paid every two months. In addition to delaying the payments to States, the Centre has now said that there is a “shortfall” in GST collections this year and the “compensation gap” will not be met by the government through its Consolidated Fund. In refusing to compensate states from its coffers or by borrowing on its own balance sheet the Union Finance Minister Nirmala Sitharam has argued that this was because of Covid-19 –“an act of God” she said. She has offered borrowing “options” to States instead.
The Goods and Services Tax (GST) revenue shortfall to states is estimated at more than Rs 3 lakh crore in 2020-21. According to government estimates, compensation cess collections in the current fiscal will be around Rs 65,000 crore, leaving a gap of Rs 2.35 lakh crore. Out of the 2.35 lakh deficit the Centre has argued that the loss to States on account of switching over to the GST is 97,000 crores. The remaining 138,000 “shortfall” appears to be attributed by the Centre to the “act of God”. The Centre wants States to borrow money from RBI for not only the “act of God” deficit of 138,000 but also the 97,000 shortfall which the centre itself has said was on account of switching over to the GST. The Centre wants to pass the buck for both to State governments. While not agreeing that the Centre can legally shrug its responsibility for a part of the deficit calling it an “act of god” the centre cannot repudiate its obligation to compensate for the loss it accepts (97000 crore) States suffered as a result of GST transition because it was on the basis of this consideration that the States had agreed to give up their regular revenue sources.
States had agreed to relinquish their independent power to tax goods and services in lieu of the Central government’s undertaking to make good the loss caused to them by joining the GST regime. Nirmala Sitharaman’s predecessor –former Finance Minster Arun Jaitley had assured compensation to States for revenue shortfalls at a 14% annual growth rate which had convinced them to join the new tax regime. A backtrack on this assurance would be a statutory failure on the part of the Centre to honour its word and for the States it would mean a loss of revenue that they could have independently raised without begging the Centre especially at a time when they say their Covid-19 expenditure is only going up. Many States are reluctant to borrow and have instead asked the central government to borrow. They have argued that the Centre is bound by its statutory obligation to pay compensation in full and some have even expressed their intention to undertake legal recourse to resolve GST-related issues.
From its side the Centre like insurance companies is looking to avoid its liability in compensating States. But can an “Act of God” argument save Centre? India’s economic growth was already plummeting following demonetisation and “unplanned” but ceremonious roll out of the GST by the govt. under the auspices of the late President Pranab Mukherjee. The midnight launch of the GST and its tax slabs did not help businesses in generating sales. Rather their sales started declining. The manufacturing activity declined as consumption declined. Unemployment had risen to new levels post demonetisation and GST. And post lockdown economic activity came to a big halt. As a result, Indian economy saw its steepest fall in GDP which contracted by “23.9 %”– negative growth for the first time.
Decline in GDP and shortfall in GST revenues resulted from government’s economic policies and lockdown. And lockdown was not an “Act of God”. Covid-19 did not put an end to jobs and economic activity just as it does not –at present, rather the haphazardly implemented lockdown did not take into account the circumstances unique to India and its daily wage workers who have a hand to mouth existence. Centre’s lockdown became an intervening act that caused most of the economic decline so the “act of God” argument is untenable. Failure to keep up its promise under GST would itself result in a failure of GST with States developing a mistrust of the Centre and the new tax regime and rethinking their part of the promise.