The GST regime has come at a major cost to states. It was for this reason that the centre agreed to compensate them. But contrary to the provisions of the GST Compensation Fund which mandate that the entire proceeds realised from levy of compensation cess be credited to it, the centre did not do so, bringing censure even from the CAG. The centre partially relented and agreed to borrow Rs 1.1 lakh crore from the market to pay the GST compensation shortfall, with the balance proposed to be raised by the states. ROHAN DESHPANDE says some states still feel they have been short-changed as any delay in payment of GST compensation impacts their own revenues. This is dangerous when it is stated which are at the forefront of battling the novel coronavirus pandemic. .——–.PRIOR to the roll-out of the Goods and Service Tax (GST) from July 1, 2017, states had substantial power to levy origin-based indirect taxes and levies such as sales tax or VAT, octroi, entry tax, entertainment tax, etc. GST introduced a consolidated levy of destination-based taxation across the nation, with the erstwhile system of fragmented taxes and levies being subsumed within its ambit..Despite the states receiving the State GST component of GST collections and a portion of Central GST and Integrated GST, there were bound to be revenue shortfalls. As per newspaper reports, GST subsumed around 47% of the gross tax revenues of states. This major transition thus came at a cost to them, with loss of revenue as well as ceding the power to tax to the centre under the Constitution (One Hundred and First Amendment) Act, 2016..“The scheme of the GST Compensation Act is, therefore, that the centre shall compensate states for their loss of revenue on a bi-monthly basis by transferring funds collected and retained in the Compensation Fund, with these payments being reconciled on an annual basis. The final revenue figures would be audited by the Comptroller and Auditor-General of India (CAG)..GST Compensation Act.It was for this reason that the centre agreed to compensate states for a transitional period of five years, ending in 2022. To that effect, the Parliament passed the GST (Compensation to States) Act, 2017..The scheme of the GST Compensation Act is, therefore, that the centre shall compensate states for their loss of revenue on a bi-monthly basis by transferring funds collected and retained in the Compensation Fund, with these payments being reconciled on an annual basis. The final revenue figures would be audited by the Comptroller and Auditor-General of India (CAG)..It was deemed that the projected growth rate of states' revenue, had it not been subsumed by GST, would be 14% per annum, with the revenue collections for Financial Year (FY) 2015-16 considered as the base year. The difference between this projected growth and the actual amounts collected by states on account of GST, year-on-year, would be payable by the centre to compensate for any notional shortfall in revenue..For the purpose of providing such compensation, the centre was authorised under Section 8 of the GST Compensation Act to levy an additional cess – the GST compensation cess – on certain luxury and demerit goods such as motor cars, tobacco, manufactured tobacco products and pan masala. The entire proceeds from the levy of this cess would be credited into a specified GST Compensation Fund (under Section 10), which would be used to pay compensation to states..The CAG Report.Contrary to these provisions which mandate that the entire proceeds realised from levy of compensation cess be credited to the Compensation Fund, for FYs 2017-18 and 2018-19, the centre did not do so despite the surplus realisation of compensation cess..“CAG noted that during FYs 2017-18 and 2018-19, the centre collected compensation cess totalling Rs 1,57,693 crore, against which the compensation actually released to states amounted to Rs 1,10,421 crore. Thus, as per Section 10 of the GST Compensation Act, the balance amount of Rs 47,272 crore had to be transferred to the Compensation Fund..And according to CAG Report No. 4 of 2020, on the Accounts of the Union Government: "The short-crediting was a violation of the GST Compensation Cess Act, 2017. The amount by which the cess was short credited was also retained in the CFI and became available for use for purposes other than what was provided in the act. … Short crediting of cess collected during the year led to an overstatement of revenue receipts and understatement of fiscal deficit for the year.".CAG noted that during FYs 2017-18 and 2018-19, the centre collected compensation cess totalling Rs 1,57,693 crore, against which the compensation actually released to states amounted to Rs 1,10,421 crore. Thus, as per Section 10 of the GST Compensation Act, the balance amount of Rs 47,272 crore had to be transferred to the Compensation Fund..However, this amount was retained by the centre dehors the provisions of the GST Compensation Act. CAG was constrained to note: "The short-crediting was a violation of the GST Compensation Cess Act, 2017. The amount by which the cess was short credited was also retained in the CFI and became available for use for purposes other than what was provided in the act.… Short crediting of cess collected during the year led to an overstatement of revenue receipts and understatement of fiscal deficit for the year.".Delayed compensation & fallout.Such a "violation" of the GST Compensation Act by the centre, as noted by CAG, a constitutional authority, is actually part of a pattern. On the one hand, while the centre retained such substantial sums of over Rs 47,000 crore in contravention of Section 10 of the Act, on the other hand, it routinely failed to make bi-monthly payments to states as per the mandate of Section 7..“Any such delayed payment of GST compensation to the states adversely impacts their revenue estimations, and consequently, their budgetary goals. Pertinently, considering that "public health, sanitation and hospitals" are state subjects under Entry 6, List II of the Seventh Schedule to the Constitution, it is states which are at the forefront of battling the novel coronavirus pandemic. The centre's continued failure to adhere to the statutory bi-monthly payment mechanism and delayed payment of pre-pandemic GST compensation has thus detrimentally affected states – including their capability to spend on battling the public health crisis as well as restarting their economies..Compensation due from December to February 2020 – a period prior to the coronavirus-related nationwide lockdown being imposed – was released only in June 2020. Before that, in February 2020, Finance Minister Nirmala Sitharaman's justification for delayed release of compensation to states was that December 2019 revenue collections were dismal. She said: "We should clear it (GST compensation due to the states) in two instalments from the surplus collected in the last two years." This statement completely failed to take into account that delay in actual payment is no justification when there is already a surplus available – a surplus which, as per the CAG and the Act, should have been retained in the Compensation Fund but which was illegally retained by the centre..Any such delayed payment of GST compensation to the states adversely impacts their revenue estimations, and consequently, their budgetary goals. Some states expressed dissatisfaction with the state of affairs..Pertinently, considering that "public health, sanitation and hospitals" are state subjects under Entry 6, List II of the Seventh Schedule to the Constitution, it is stated which are at the forefront of battling the novel coronavirus pandemic. The centre's continued failure to adhere to the statutory bi-monthly payment mechanism and delayed payment of pre-pandemic GST compensation has thus detrimentally affected states – including their capability to spend on battling the public health crisis as well as restarting their economies..Lingering concerns.The adverse economic impact of the pandemic has proportionately impacted revenue collections from GST, at both the central and state level. This includes a fall in the compensation cess actually collected by the centre. In view of the shortfall, the centre initially took the stand, purportedly backed by the attorney general's opinion, that it was under no obligation to make payment of GST compensation to states beyond the actual realisation of proceeds from levy of the cess (i.e., if Rs 100 is collected from the compensation cess, while Rs 500 is payable as per the 14% projected growth rate in states' revenue, the centre will pay only Rs 100 to states)..The justification by the centre for such non-payment beyond the actual collection of the cess was presumably that it cannot dip into the Consolidated Fund of India for making payment of GST compensation, as Section 10(2) of the GST Compensation Act states: "All amounts payable to the States under section 7 shall be paid out of the [Compensation] Fund.".Instead, the centre proposed that states borrow funds to meet the shortfall. Some states opposed the move, and rightly so, considering that such an expectation in the present scenario would further strain their economies. One of the options, as proposed by the opposing states, was that the centre should instead borrow and release the legitimate dues of the states..Despite initial reluctance, ultimately, the centre partially relented and agreed to borrow Rs 1.1 lakh crore from the market to pay GST compensation shortfall, with the balance proposed to be raised by the states through their borrowings. Certain states such as Kerala continue to demand that the entire shortfall of Rs 2.35 lakh crore be borrowed by the centre and paid to the states..Any such shifting of the burden to meet compensation shortfall from the centre to the states renders Section 7 of the GST Compensation Act, dealing with calculation and release of compensation, otiose. A situation results whereby the figure calculated as being payable under Section 7 is not fully paid on the ground that proceeds of the compensation cess, collected by the centre and credited to the Compensation Fund along with the centre's borrowings, are insufficient to meet the latter's obligation. If challenged before constitutional courts, it is debatable whether the centre's view will prevail..Extending the cess.The finance minister announced on October 5, 2020, that the transitional period of five years for payment of GST compensation will be extended beyond 2022 by the centre. Even the chairperson of the Fifteenth Finance Commission has stated so on October 18, 2020 – indicating that the levy of compensation cess may have to be extended till as late as 2025-26. This would require an amendment as Section 2(1)(r)of the GST Compensation Act defines "transition period" to be five years from the date when State GST was adopted by the respective states (2017)..Since such a move to extend the period is contemplated, it would not be out of place for the centre to consider amending Section 10 of the GST Compensation Act to expressly provide for utilising the balance available in the Consolidated Fund of India to make payment of GST compensation to states. This would prevent either the centre or the states from being compelled to borrow for meeting the current or future shortfall. This can even be a temporary measure, with the amount released from the Consolidated Fund of India being set-off against future compensation cess collections either prior to or beyond 2022..(Rohan Deshpande practices as a Counsel in the Bombay High Court and writes on law and current affairs.)
