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August 31, 2020

Punjab FM Writes To Nirmala Sitharaman Over GST Compensation Reject Both Option

by CA Shivam Jaiswal in GST, GST Circular Notification

Punjab FM Writes To Nirmala Sitharaman Over GST Compensation Reject Both Option

GST Compensation Read Full Letter by Punjab FM

I write this letter to raise some concerns on the two options relating to GST Compensation that were offered at the last GSTC Meeting.

You will kindly recall that a number of Honble Members at the meeting had stated that the minutes of the 7th 8th and the 10th meetings of the CGST clearly record the statements of the then Honble Chairperson to the following effects:

  • The compensation would be I 00% of the revenue loss;
  • It would be paid within the stipulated period of 5 years:
  • It is the Central Govt. that has the obligation to pay;
  • only the manner of funding was to be decided by the Council;
  • If there were to be shortage, the required funds could be borrowed.

I get the sense that the central Govt. is unable to persued itself to agree with these submission and has offered the two options breaking from recorded past that has the force as good as that of law.

The constitutional provision itself expects that the central law on compensation shall be made in accordance with the recommendation of the council. Any law which doesn’t recognize this recommendation is thus unconstitutional.

On page 28 of the Minutes of 8th meeting of the Council, a formal decision is record. that Section 10(2) of the proposed draft GST Compensation Bill be modified to clearly reflect that in case the amount in the Compensation Fund is likely to fall short or fell short, the Council shall decide the mode of raising the additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent year.

However the draft GST Compensation Bill presented subsequently was worded making no mention of the liability of the Central Government or of such borrowing. In fact when it was pointed out at the 10th meeting, the Secretary of the Council stated (which is recorded at para 6.5 on page 13) “that Central Govt.” could raise resources by other means for compensation and this could then be recouped by continuation of cess beyond 5 years.

He stated that other decision including possibility of market borrowing for payment of compensation was part of the minutes of the 8th meeting and need not be incorporated in the law. The Council agreed to this suggestion.’

Thus it is evident that GST Compensation Act was not worded us per the decisions of the Council but, in view of the assurance given by the Secretary to the Council, the Council agreed not to insist on the legal change. This implies that the decisions of the Council were to be treated as having the force of the law.

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 I wonder whether the opinion of Honble AG has been obtained after inviting his attention to these minutes. If not, the opinion to that extent is based on inadequate material and shouldn’t even have any persuasive value, much less any binding force, which it doesn’t have in any case.

Having enacted the GST Compensation Act, 2017, the words “loss arising on account of implementation of the GST” appearing in the Constitution stand defined in the said Act. This is evident from the Preamble to the Act which provides as follows: ‘An Act to provide for compensator’ to the States for the loss of revenue arising on account of the implementation of the goods and services tax In pursuance of  the provisions of the Constitutional (Hundred and First Amendment Act,2016) The word Compensation has also been defined in Section 2(d) of the said Act as follows: ‘Compensation means as amount. In the form of good and services tax compensation. as determined under section 7.

Section 7 of the Act provides for the manner of calculating compensation which is principally the difference between the projected revenue and actual revenue.The projected revenue is also defined in section 2(k) read with section 6, which is 14% CAGR over base year revenue.

Thus compensation can neither be increased nor reduced without amending this Act. Compensation is no more in executive decision et. any level of the Government or even the Council.

Letting States borrow under Article 293 of the Constitution is no compensation at all. GST Compensation Act itself requires that all resources must be first credited into the Compensation Fund which shall form part of the public account of India (Section 10).

How can money borrowed by a State be credited the Compensation Fund? Centre is only recognizing GST-loss by assuming a 10′, of the growth over PY and attributing the rest to the pandemic.

This makes the whole exercise of calculating losses arbitrary, one-sided and devoid of any legal justification. GST revenues were growing at about 4% in the pre-Covid year 2019-20. The GDP growth in 2019-20, Q4 of in particular, had also significantly slowed down. We believe that applying a rate of growth of 10% to project a higher revenue loss due to Covid-19 is over-simplistic, statistically incorrect, besides being legally unsound.

Covid-19 has impacted different countries differently and within India different Slates differently. Punjab is primarily an agrarian State and had a bumper Rabi crop. Restricting compensation uniformly for all States is devoid of sound logic.

Such a rationale gives Centre the power to keep defining any future loss also as loss due to possible vagary of one kind or the other that are integral to our existence in a world prone to turbulence. Averages are meant to take care of extremities and 14% growth agreed, and since legislated, was meant to take care of such adversities as well.

Thus the least Centre has to do to carry forward with the given options is to get them enacted through legislative process and that too on the recommendation of the Council. Council otherwise doesn’t have the power to alter the compensation mechanism suo motto. This was also the essence of the assurance that Compensation provision will be legislated find not left to the executive discretion. 

As you know Punjab is now the highest GST-deficit-State in India. Our revenue loss in Option 1 would still remain unpaid even after availing our share of the special window as well as the additional 0.5% of the fiscal deficit. There may be other States on similar footing. Leaving the latter borrowing unprotected by any future revenue stream means the practical impossibility of such a borrowing, besides putting the Suite into a position of great peril.

Option 2 is in breach of even what AG has stated in his opinion. There is no rationale for the Centre to charge the cost of borrowings to the States.

 I also wonder whether there can be two different figures of revenue loss. I doubt Constitution allows such differentiation. There has to be only one figure of revenue loss and you have rightly recognized it in the second option. Two different solutions to a problem cannot mean that two different problems exist.

It is also not clear when shall the impact of Covid- 19 be agreed to have tapered off. We should also have clarity about the scenario likely to emerge if we continue to follow similar approach going forward. How will compensation be calculated in the period after January 2021?

 If projections are made till the end of compensation period (with reasonable assumptions) the total revenue loss may cross 4,50,000 cr. This, together with interest, would require more than 4-5 years to repay the borrowings rather than 2-3 years that is being believed.

It was stated by many Members at the meeting that borrowings by States may be costlier anywhere from 50.150 basis points. Moreover interest rates vary across States depending on the lender’s perception of respective financial soundness. When resources for payment have to come from a tax that is levied by the authority of the Parliament it makes no sense for States to borrow. States individually have very little role in the finalization of CAST structure or tax rates. Our future borrowings and repayment capacity will alter based on what decisions are taken by the GSTC where Central Govt. alone has a decisive vote. Any future dispute in relation to GST Compensation will have deleterious impact on the States creating situations of defaults by States.

We thus take both the options with great regret as a clear breach of the solemn and constitutional assurance by the Central Government. We believe this as betrayal of the spirit of cooperative federalism that formed the backbone of GST-journey so far.

Punjab would like full clarity on each of these issues and the matter once again placed on the agenda of the next meeting which may be called urgently. It would help if the issues raised in this letter, and by others, are addressed through an agenda paper circulated well in advance. Views may also be invited on resolving the possible dispute under the mechanism provide under Article 279A (11) of the Constitution.

Alternatively a GOM may be constituted to deliberate on the matter and make recommendations in a time-bound period of 10 days. Punjab is prepared to cooperate in a spirt of finding a solution to this vexed problem but is unable to persuade itself to either of the options presented at this stage.

While on the subject, I may also suggest that we need to work towards a lasting solution to reduce compensation and Punjab is ready to support all pragmatic measures that may be necessary to restore the fiscal health of the Centre and States.

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