Centre not obliged to make up for GST loss of states, says Attorney General

There is no obligation on the part of the central government to pay GST compensation shortfall to states, the Attorney General of India has said.

Sources close to the development revealed that the Finance Ministry had sought fresh legal opinion about its responsibility to compensate the states facing shortage in GST collections.

GST collections have been slow since the middle of last year but after the outbreak of COVID-19, tax collections had shrunk to half the levels for most states in the months of April and May this year.

Sources said that the legal opinion has suggested that it is not the Centre but 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, sources said the AG has opined.

It would be, however, for the central government to take a final decision in the matter under article 293(3) of the Constitution.

The Constitution provides for GST compensation to states for loss of revenue on account of GST implementation.

But government sources said that there is no obligation under the Constitution or GST laws to make good the loss on account of natural disaster, COVID, or economic slowdown etc because they are not related to implementation of the GST. It is the GST council which has to decide how to meet the shortfall in such circumstances and not the central government.

In 2017, the Centre came under pressure to compensate states for shortfall in indirect tax collection by dipping into Consolidated Fund of India. But Parliament rejected this amendment before clearing the GST legislation.

On Monday, the Finance Ministry said that it has released ₹13,806 crore to states as compensation for their revenue loss in the Goods and Services Tax (GST) regime for March, 2020. Taking this amount into account, entire compensation up to 2019-20 has been released to States.

The Centre has paid ₹1,65,302 crore as compensation for FY20 whereas the amount of cess collected during the year 2019-20 was ₹95,444 crore.

To release the compensation for 2019-20, balance of cess amount collected during 2017-18 and 2018-19 has also been utilised by the Finance Ministry. In these years the collection of cess was more than actual compensation paid to the states.

In addition, Centre had transferred ₹ 33,412 crore from Consolidated Fund of India to the Compensation Fund as a part of an exercise to apportion balance of IGST pertaining to 2017-18.

With shortfall and compensation needs expected to expand this year on account of lower collections due to a squeeze in business activities due to COVID-19, the Centre wants the GST Council to explore measures to finance the compensation fund rather than the responsibility falling on it.

GST compensation is released at the end of every two months. After the Goods and Services Tax (GST) regime was put in place, the Centre assured the States, through legislation, that the revenue shortfall will be compensated fully for first five years.

The 2015-16 was assumed to be the base year for calculating the compensation amount for a financial year. The growth rate of revenue for a State during the five-year period is assumed at 14 per cent per annum. Any shortfall in this growth number is to be compensated.

For the Centre, payment of GST compensation dues would further strain its resources that is already impacted with less than encouraging overall tax collections. With economic growth now projected to slump and pressure on it to come out with more economic packages to take the country out from a recession owing to COVID-19, the centre is in a bind how to manage the needs.