The GST compensation impasse continues. And is an avoidable distraction for both the Centre and the States in this most critical of times when the country is facing, as per the RBI, a possible GDP contraction of up to 9.5 percent.

The challenge today is because of the plunging revenue caused by the pandemic. The compensation burden on the Centre has increased dramatically. And the compensation cess kitty has not. The extent of shortage is such that it cannot be made good by increasing the cess or even the basket of commodities on which cess can be imposed. There is no option other than borrowing.

The issue of having to resort to borrowings in case of a shortfall in the availability of cess amount was discussed in several GST council meetings when the draft Compensation Cess Act was being discussed. The Chair of the Council, the then Finance Minister had consistently responded that the Centre could always resort to borrowing from the market to make good any shortfall. We should also remind ourselves of the animated discussions leading to the States agreeing to the Constitutional Amendment.

The report of the Select Committee on the Constitution (One Hundred & Twenty-Second Amendment) Bill which translated into the Constitution (One Hundred and First Amendment) Act 2016 delves at length on the concerns of the states about the possible loss of revenue. The Select Committee with members from all political parties had categorically recommended that Parliament ‘may’ by law on the recommendation of the GST Council provide for compensation.

Significantly, the Centre in the course of the discussions in Parliament agreed to substitute ‘may’ with ‘shall’ to allay concerns. Thus, the possible ambiguity of ‘may’ was also eliminated in the final version of the Constitution Amendment Act. The short point being compensation for loss of revenue was always a concern for the States. And the Centre had always assured the States of making good the shortfall.

VIEW: The compensation challenge in the GST regime

It is this background that the Centre’s proposed two options and the indignation of the States have to be seen. The borrowing in both options is to be done by the States albeit facilitated by the Centre. In the first instance, the Centre offered to fund the principal and the interest through the compensation cess window which would accordingly be extended beyond the transition period; in the second the offer was restricted to repayment of the principal from the proceeds of cess.

Unfortunately, what was primarily an economic issue, and could have been addressed through dialogue, typically and predictably became entangled on political lines. State Governments of the ruling party or run by parties owing allegiance to the ruling party agreed for option one. Opposition run states have rejected both options.

The 42nd GST council meeting convened to resolve the deadlock found no solution; the PIB press release after the meeting makes very interesting reading not in what it says but on what it does not. There is no mention at all of the issue which is threatening the very fabric of GST and the very reason why the meeting was convened.

The issue boils down who would do the borrowing. The argument that borrowing by the Centre which already faces large borrowing requirements and additional borrowing will impact g-sec yields and result in an increase of costs of borrowings for all borrowers—Centre, States and private sector, is specious. The States are in a worse fiscal position than the Centre. And in any case, the Centre’s capability to raise funds and resilience to withstand fiscal shocks is many times higher than the States.

The recent financial audit report of the CAG (Report Number 4 of 2020) could not have come at a worse time for the Government. The report states that the Centre did not transfer Rs. 6466 crore of compensation cess in 2017-18 and Rs.40,806 crore in 2018-19 apart from also retaining a portion of the IGST. As Prof. Govinda Rao has mentioned the Centre cannot appropriate cesses when there is a surplus collection and distance itself when there is a shortfall.

Incidentally, the CAG report also highlights the strange occurrence of the Centre having collected (and retained) Rs 382 crore from 17 cesses which had been abolished/subsumed in GST. All this adds to the trust deficit.

The opposing States are seeking to have a Vice-Chairman of the GST council as provided for in the Article 279A (3) and for having a dispute resolution mechanism as provided in Art 279A (11). Neither of these demands bode well and are a reflection of how federal relations have soured.

There is too much at stake here. All options should be brought to the table. A GoM is said to be one such option and should help in defusing tensions. Building consensus should be the aim-at all costs.

And if that means the Centre having to borrow to the extent of the shortfall— be it Rs. 93,000 or Rs. 1,10,000 or Rs. 2,35,000, so be it. The Centre should be magnanimous.

The guarantee of making good the shortfall was the glue which binds GST together. It is a legal and moral commitment given by the Centre and has to be honoured. The Centre cannot let down GST which was not so long ago hailed as a triumph of cooperative federalism. The consequences of doing so would be disastrous.

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal

Read his other columns here

(Edited by : Ajay Vaishnav)

First Published:Oct 9, 2020 5:17 PM IST