As the GST Council meeting gets underway to decide on the way ahead for compensating states, sources have sought to clarify that revenue crunch was faced by both Centre and states due to Covid -19 pandemic, and resolution to the problem was not the responsibility of the Centre alone.
It’s expected that in Thursday’s meeting states would push for centre to borrow from the market and compensate them for the shortfall in protected revenue. Several state finance ministers have put the onus on Centre to mobilise resources as it was “morally bound” to do, and have shot down the proposal that states can borrow on their own to bridge the deficit.
However, sources said that law was clear that compensating states was binding on the Centre if shortfall arose ‘on account of implementation of goods and service tax….’ but in the current scenario the revenue shortfall was due to the pandemic.
“It’s a force majeure situation and the Centre and States have to collectively resolve it according to the true spirit of the GST Act under the federal framework of the constitution. The GST Council will have to put its collective decision making mechanism at work to resolve this critical issue,” a source said.
According to an estimate, GST compensation cess requirement for the FY 2020-21 stands at over Rs 3 lakh crore or Rs 26,000 crore per month, primarily brought about by the economic stagnation during the pandemic.
“It’s an enormous amount which needs to be compensated through the compensation fund under GST Act at the rate of 14% increase year-on-year for two more fiscal years. The government has paid compensation cess successfully for three fiscal years so far to the states and union territories since the roll-out of GST in July 2017,” another source said.
Central government released Rs 1.65 lakh crore as compensation to states in FY 2019-20 whereas the amount of cess collected stood at Rs 95,444 crore. This translates to an average monthly compensation payment of Rs 13, 775 crore on the collection of Rs 7954 crore.
Another source pointed out that attorney general had also agreed that Centre had no obligation under the GST laws to compensate for the loss of revenue on account of natural disaster, pandemic, or economic slowdown as they are not related to implementation of GST. Hence, the GST council has to decide how to meet the shortfall in such circumstances and not the central government, he added.
During GST Council discussion prior to its rollout, the members had envisaged the problem of compensation cess fund not being adequate to protect states’ revenue guaranteed by the constitution. At that time, the then union finance minister Arun Jaitley had ruled out that compensation to the states due to shortfall of GST implementation can be paid from the Consolidated Fund of India. However, if required market borrowing could be an option to compensate and later the same can be repaid through the future collection of cess, he had said.