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The GST Council will meet on August 27 to discuss modalities to meet the shortfall in compensation paid to States for their revenue loss on account of GST implementation. Another meeting of the Council has been scheduled on September 19 to discuss various other issues.
The August 27 meeting assumes significance as it will consider the opinion given by the Attorney General (AG) on ways to meet to the compensation shortfall.
According to sources, the AG has opined that there is no obligation on the Central government to pay the GST compensation shortfall. It is the GST Council which has to decide on making good the shortfall in the GST compensation fund by providing the sufficient amount to be credited to this.
“The GST Council can recommend to the Centre to allow the States to borrow on the strength of the future receipts from the compensation fund. It would be, however, for the Central government to take a final decision in the matter under Article 293(3) of the Constitution,” said a source, highlighting the AG’s opinion.
‘No obligation on Centre’
The AG said the Constitution provides for GST compensation to States for loss of revenue on account of implementation of the GST. “There is no obligation under the Constitution or GST laws to make good the loss on account of a natural disaster, Covid-19, economic slowdown, etc, because they are not related to the implementation of GST. The GST Council has to decide how to meet the shortfall in such circumstances, and not the Central government,” an official explained the AG’s opinion.
Another source said the Parliament in 2017 rejected an amendment which had proposed make the Central government accountable to meet the GST compensation shortfall by paying from the Consolidated Fund of India.
In fact, the issue had come up again during a Parliamentary committee meeting last month, where Finance Ministry officials expressed the Centre’s difficulty in paying GST compensation to States. On Monday, the Centre claimed settling the compensation for full fiscal 2019-20 by paying over ₹1.65-lakh crore as against a cess collection of ₹95,444 crore.
The Goods and Services Tax (Compensation to States) Act, 2017 mandates payment of full revenue compensation for the first five years from the date of introduction of GST. It is paid bi-monthly; the last instalment for a financial year is given in the next year.
Compensation cess
For calculating the compensation amount, the projected nominal growth rate of revenue subsumed for a State during the transition period has been fixed at 14 per cent per annum. For calculation, 2015-16 has been taken as the base year. Cess is levied on various goods and services falling in the category of 28 per cent slab to pay for the compensation.
The options before the GST Council for meeting the shortfall are: to rationalise GST rates, cover more items under the compensation cess or increase the compensation cess, or recommend higher borrowing by States to be repaid by the future collection into the compensation fund, etc. Considering the current situation of economy, it is believed that borrowing could be the best possible solution.
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