Can’t Pay States GST Compensation At Current Rate: Government Tells Parliamentary Panel

The central government will not be able to pay the promised 14% GST compensation to states due to low tax collections, Finance Secretary Ajay Bhushan Pandey is said to have told a parliamentary panel.

The issue of delay in payment of compensation to states was raised by opposition party members in the Parliamentary Standing Committee on Finance headed by Jayant Sinha of the ruling Bharatiya Janata Party, according to a person aware of the details who spoke on the condition of anonymity.

The promise of protecting states’ revenue at an annual 14% growth rate was based on certain assumptions which could not be met, Pandey is said to have told the panel.

The central government compensates states bimonthly after certain levies like value-added tax was subsumed under the goods and services tax. The payout--that can only be made out of the compensation cess fund--is guaranteed for five years, and is calculated at a growth rate of 14% keeping 2015-16 as the base year. As indirect tax collections declined last year, the government had stopped releasing the compensation to states.

Pandey said if GST revenues drop, the law allows for a relook at the promised compensation, according to the panel member. The central government is reneging on the commitment to compensate states that had agreed to give away their powers to impose indirect taxes when GST was implemented, the person said.

An email sent to Pandey didn't elicit a response.

Recalibration of the compensation payout to states due to lower GST collections will shake the foundation of GST Council, and the GST framework under which states agreed to give away their powers to levy tax in exchange for a promised compensation, said Rohan Shah, an independent tax lawyer. The structure of GST Council is interdependent, and states and centre must jointly agree to any fundamental structural changes in the GST regime, said Shah.

Kerala Finance Minister Thomas Isaac tweeted on Wednesday that if the centre takes a stand that GST compensation can’t be paid and present arrangements be revised by GST Council, it would be a “brazen betrayal of federal trust.”

Any change in the formula for compensating states will need an amendment in the GST (Compensation to States) Act after approval from the GST Council, said L Badri Narayanan, a partner at Laxmikumaran & Sridharan. If the central government makes amendments to the act without an approval from the GST Council, the states can move the Supreme Court challenging the changes as ultra vires, Narayanan said.

Pandey, in a post budget interaction with the industry earlier this year, had said, “14% compensation was based on the presumption that economy will grow at the rate of 12-13% and therefore the collections would also grow at that level, but we  have seen during the last few months the actual economic growth has been lesser to some extent, and accordingly this [compensation] would also get impacted. Whatever is getting collected in the fund, it will be paid.”

In 2019-20, the central government has released Rs 1,65,302 crore as GST compensation to states.

Punjab Finance Minister Manpreet Singh Badal, however, tweeted on Tuesday that the central government has compensated states up to March 2020, and dues for four months—April, May, June, and July 2020—are pending. His tweet came in response to Union Minister Harsimrat Kaur Badal’s who wrote that all GST dues of states have been cleared.