The Goods and Services Tax (GST) was brought into force on 1st July 2017 under the Constitutional Act (101st Amendment , 2016. It was incorporated for two basic reasons: first, it would simplify the tax collection process by avoiding the cascading effect of taxation; second, it would increase the revenue of the government.
The Introduction of GST was considered a historic and landmark decision in India’s fiscal administration. There are several reasons to support that GST is better than our old indirect tax regime. First, it leads to frictionless commerce between the states. Second, taxes are buoyant, meaning that if the GDP of the country grows, the tax collection will increase along with it. Third, it leads to removal of the cascading effect of “tax on tax” , meaning that GST subsumes various state and central taxes thus reducing the burden on the customers.
When GST was introduced, states feared that it would lead to a decline in their revenue. To pacify them, the Centre promised that all revenue shortfalls arising from the adoption of this new indirect tax regime would be made from the GST compensation cess for a period of five years (this compensation would terminate in 2022). GST compensation cess would be paid from the tax revenues earned from the GST levied on luxury and sin goods at the rate of 28%. In case GST compensation due to the states are less than the receipts of the GST compensation cess, then the balance would be transferred to the Consolidated Fund of India. According to the GST Act, States and Union Territories are guaranteed compensation if GST revenue growth is less than 14%. This amount would be paid on a bi-monthly basis. For example, if the state initially had a revenue collection of 100 units and after GST its only 108 units, then growth is less than 14% (114). Since it is 6 units less than the guaranteed 14%, it will be compensated by the Centre from GST compensation cess.
Everything was going fine until July 2019. The Centre was fulfilling its obligation to pay the states from GST Compensation Cess. In fact, collection of cess was more than the amount of compensation to the states. But the fiscal situation of both state and central governments started to deteriorate from July 2019, and the situation became worse after November 2019. Additionally, owing to the coronavirus pandemic, the revenue of the Central Government declined and created an economic crisis in the country.
GST compensation dues of the states were cleared upto 31st March 2020. The Finance Ministry estimated that in the financial year 2020-21 states could face a GST revenue gap of ₹3 lakh crores . The Centre estimated collections from the GST Compensation Cess in the same period to be ₹65,000 crores . Hence, the States are expected to witness a shortfall in GST compensation of around ₹ 2.35 lakh crores in the present financial year. However the centre said that out of 2.38 lakh crores only 97,000 crores is due to GST implementation and the remaining 1.38 lakh crores is on account of COVID-19, which they term as an unforeseen “Act of God”. There is no constitutional obligation on the Centre to compensate the States from the Consolidated Fund of India in case of shortfall in the GST Compensation Fund.
The centre has given two options to the states to cover their revenue shortfall in the current financial year. First, they can borrow ₹97,000 crores , which is the shortfall purely on account of GST implementation, using government-linked security interest rate that is lower than market rates, and the rest 1.38 lakh crores can be borrowed from the open market. Second, the states can borrow the entire sum of Rs 2.35 lakh crores from the open market, an activity which would be facilitated by the RBI. The government proposed to extend the imposition of GST Compensation Cess beyond the mandated five years i.e, June 2022. This extension would help the states to repay their debts as the loan taken from the RBI or the open market would be repaid by the Centre from the GST Compensation Cess after 2022. However, only the principal amount would be repaid by the centre, the interest charged would have to be borne by the states.
In response to these options , several arguments were made by the states . The states said that the constitutional framework of GST did not lay out an escape clause for difficulties arising out of any Act of God. West Bengal demanded that the centre should compensate the states from other cess collected by the Centre like Health and Education cess, etc. The Delhi government said that since the excess of the GST Compensation Cess was transferred to the Consolidated fund of India in the first 2 years post implementation, in case of shortfall the centre should tap the Consolidated Fund of India. Some other states like Punjab argued that the Centre should itself borrow funds to repay the states.
There are various reasons to support the argument that the Centre should themselves borrow the money . First, the states do not have as many borrowing options as the Centre has. For example, the Centre can release sovereign bonds both in rupees and dollars or the Centre can take loan from the financial institutions against the public sector units shares (PSUs). Second, the rate at which the Centre would get a loan would be lower because of their higher credibility. Third, states borrowing would increase public debt. So credit rating agencies, international creditors like the world bank note the public debt not the central or state debt. Fourth, fighting a recession is the chief responsibility of the Central government.
From the options given by the Centre, 21 states went for the first option of borrowing ₹97,000 crores from the RBI and the remaining 2.38 lakh crores from the open market. States that are yet to revert to the borrowing plan are Jharkhand, Kerala, Maharashtra, Delhi, Punjab, Rajasthan, Tamil Nadu, Telangana and West Bengal. These states have said that as the sovereign, the Centre should raise funds from the market to bridge the shortfall in the compensation cess funds. States which fail to submit their options before the GST Council meeting on October 5 will have to wait till June 2022 to get compensation , subject to the extension of the GST Compensation Cess period beyond June 2022.
Written By Raunak Agrawal, second year B Com Hons. student at Shri Ram College of Commerce