About Goods and Services Tax and GST Act 2016
Goods and Services Tax is a comprehensive value-added tax that Indian Government along with respective state governments levy on manufacture, sale and consumption of most of the goods and services meant for domestic consumption.
GST is applicable only on the supply side of the goods and services. It is charged based on destination-based consumption taxation.
To introduce this tax regime, GST Bill was presented in the Parliament in 2014 and got approved in August 2016 as The Constitution (101st Amendment) Act.
Under this Act, it was decided that there will be two types of GSTs i.e. CGST (Central GST) and SGST (State GST). Any tax levied on a particular product will be divided into two parts. SGST will go towards states and CGST will be kept in Federal Treasury.
Article 246A of the Constitution of India confers states with the power to tax goods and services.
Article 279A provides for establishment of GST Council to govern and administer GST. The President forms the Council and it’s chaired by Union Finance Minister along with ministers nominated by states.
What is GST Compensation Cess?
When GST Bill was introduced, there were speculations within states that there will be loss of revenue with in states. So, a separate Act called GST (Compensation to States) Act, 2017 was also passed.
GST (Compensation to States) Act, 2017
Under the Act, it was provided that the percentage of annual revenue growth of a State be projected as 14%. If the annual revenue growth of a State is less than 14%, the State is entitled to receive compensation under the statute.
The compensation payable to a State shall be provisionally calculated and released at the end of every two months period.
GST Compensation Cess:
According to the Act, the generation of revenue under the Act would happen through a GST Compensation Cess.
The cess comprises of the cess levied on sin and luxury goods for five years.
According to the Act, the entire cess collected during the year was to be credited to a non-lapsable Fund (the GST Compensation Cess Fund).
The collected compensation cess flows into the Consolidated Fund of India (CFI) and is then transferred to the Public Account of India, where the GST compensation cess fund has been created.
The State-Centre Tussle The Tussle started when the Central Government delayed the GST payments to the states for August-September 2019. This started a trend of delayed payments from the centre. The pressure was further intensified due to multiple reasons
The Onset of Pandemic: The Centre was on the path of discovering ways to get rid of the delay when the COVID-19 pandemic hit the world. It soon entered India and this led to fall of tax collection shattering the collection expectations of both centre and states.
Global Economic Slowdown: The economies, worldwide, were facing downward trend during the time and it had a detrimental effect on demand and supply in India which finally led to dented GST Collections
Another reason was that the 14% revenue Growth that was projected by the centre turned out to be overestimated. The real growth revolved around 10% mark.
These reasons worsened the conditions and finally created a situation where Centre owed Rs 30,000 crore as GST Compensation to states. States were seeking the amount and Centre found itself unable to make the payment.
Views of States vs. Views of Centre
Dishonour to Moral and Legal Obligation
Some of the states asserted that it was the moral and legal obligation of Centre to give GST Compensation to states for the revenue shortfall in time and Centre’s defaulting on their obligations clearly showed failure on government’s part.
The inability of the GST Council
GST Council was set up to address any dispute arising out of GST Framework but the 39th GST Council meeting during the time didn’t give an effective resolution to the stalemate between states and the Centre.
The functional aspect of the Council was also questioned as states said that by having 1/3rd voting power in the council, the Centre has the virtual veto over decision making.
Involvement of the Supreme Court
Apart from GST council, the Acts through which GST was to function didn’t provide for any alternative remedial mechanism, so states said they were left with just one option and that was to move Supreme Court for dispute resolution under Article 131.
Act of God
The Centre asserted that COVID-19 Pandemic was an ‘Act of God’ leading to lower revenue shortfall and under such circumstances Government has no legal obligation to compensate the states in a timely manner.
Inadequacy in GST Compensation Cess
The Government said that it receives the inflow towards GST Compensation Fund comes from GST Compensation Cess and if the cess is low, it doesn’t make Centre legally liable to compensate states by diverting funds meant to be used elsewhere.
The Two Options
The Centre clearly said that instant clearance of dues is off the cards and provided states with two options:
Option 1: The Government offered states to borrow the shortfall arising out of GST implementation, to be borrowed through issue of debt under a special window coordinated by the Ministry of Finance. The option is to ensure steady flow of resources similar to the flow under GST compensation on a bi-monthly basis.
Option 2: It has offered the states to borrow the entire compensation shortfall (including the COVID-impact portion) through issue of market debt. The states will not be required to repay the principal from any other source. However, the interest shall be paid by the states from their own resources.
The Dispute was finally resolved as all the 28 states and 3 UTs with legislatures accepting the Option 1 given by the Government. Under the option, Government operationalised a special borrowing window of 1.1 lakh crore out of which Rs. 30,000 crores were instantly borrowed by the Centre.
This was a Win-Win situation for both centre and the states as the interest was to be paid from the cess during the transition period and after the new resolved mechanism starts running, the principal along with the interest were to be paid through the cess. The states don’t have to pay the interest from any other source. On the other hand, as the loan is in the name of the states, the fiscal balance sheet of the Central Government will be clear from this debt which would have affected the centre if the states chose Option 2.
Making considerable structural changes working mechanism of GST Council to make it more robust and unbiased in decision making. The Council has the power and nature to play a larger role in the whole process.
As of now, GST doesn’t apply to petroleum products, electricity, real estate, agriculture etc. If the government widens this scope, we can have a larger base for taxation in the future.
The Rebuilding of Institutional Capital can also prove to be a beneficial step forward in the whole GST Regime. The efforts must be made to increase political capital through other institutions.