DECEMBER 04, 2019

By Vijay Kumar

IN his budget speech of 2008-09, the then Finance Minister Mr. Chidambaram said,  

Following an agreement between the Central Government and the State Governments, the rate of Central Sales Tax was reduced from 4 per cent to 3 per cent in this financial year. It is now proposed to reduce the rate to 2 per cent from April 1, 2008. Consultations are underway on the compensation for losses, if any, and once agreement is reached the new rate will be notified. I am also happy to report that there is considerable progress in preparing a roadmap for introducing the Goods and Services Tax with effect from April 1, 2010 .

It appears he didn't pay up.

On December 10th 2014, the then Finance Minister Mr. Arun Jaitley told the Lok Sabha,

You want the GST to come; and in 2009 the Central Government promises the CST compensation . We are in December, 2014. Every Chief Minister is coming to me to ask why they should trust the Centre. Until 2014, you have not given it . Tomorrow, I have called all the Finance Ministers of the States and GST is an issue on which broadly most parties have agreed.

A major impediment in the implementation of the GST has been the trust deficit between the States and the Centre . One of the major reasons for this trust deficit is non-payment of the CST compensation to the States from 2010 onwards. In my meeting with the Empowered Committee of the State Finance Ministers on 3rd July, 2014, I had committed that partial payment of the outstanding CST compensation will be released this year. I stand by this commitment given by me. Despite difficult and challenging situation, I proposed to release about Rs.11,000 crore which is one-third this year as part payment of CST compensation to the States. This will take care of the amount from 2010-11 onwards; the balance amount I will start paying from the next financial year onwards when hopefully the situation would be better.

I am making this commitment today to this House. GST is not an issue on which we are divided on partisan lines. Most State Governments are going to benefit; the revenues are going to improve as far as the Centre is concerned and States are concerned. I wish to just assure this House with this commitment.

Then, they brought out the greatest, biggest, simplest tax - the GST and promised compensation to the States. Even a legislation called the 'GST Compensation to States Act' was brought in as An Act to provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016 .

As per this Act, ' The compensation payable to a State shall be provisionally calculated and released at the end of every two months period, and shall be finally calculated for every financial year after the receipt of final revenue figures, as audited by the Comptroller and Auditor-General of India' .

But it seems, the States are not getting this compensation for the last two months. CST or GST, when the Centre has to pay the States, there seems to be a cash deficit more than a trust deficit.

Kerala Finance Minister, Mr. Thomas Isaac tweeted recently,

Centre is defaulting constitutionally guaranteed GST Compensation payment to states. State Finance Ministers of Punjab, Bengal, Rajasthan and Kerala issue a joint statement of protest. The current delay has shaken the confidence of the States who have so far supported GST

Punjab Finance Minister Mr. Manpreet Singh Badal said he may approach the Supreme Court if the Centre fails to release the GST compensation to the state. "We will demand either give us the GST compensation or form a dispute resolution mechanism over this issue. Otherwise, the states have the option to approach the Supreme Court for any dispute with the Centre.", he said.

Who will resolve GST Disputes between Centre and States?

Can Punjab or any State get relief from the Supreme Court if the Centre does not pay up GST Compensation? What is the remedy for the States?

Speaking in the Rajya Sabha on 11.05.2016, on the suggestion to create a dispute redressal mechanism headed by a Supreme Court judge, the then FM, Mr. Jaitley said it would be like giving powers to the judiciary to decide on the legislative power of taxation. He said "step by step, brick by brick" the courts are encroaching into the powers of legislature. He asked the opposition not to allow the judiciary to enter into matters of taxation, so far untouched by judicial intervention in legislation.

He said, "You are suggesting that if states can't decide in the GST Council, a body headed by the Supreme Court judge must then decide. For heaven's sake, I beseech you in the interest of Indian democracy not to go on this misadventure. With the manner in which encroachment of legislative and executive authority by India's judiciary is taking place, probably financial powers and budget making is the last of the only powers that you have left."

What do the State Finance Ministers do? What happens to co-operative federalism and pooled sovereignty?

Pooled Sovereignty

Students of Political Science are taught that sovereignty is indivisible. But GST seems to operate on a concept called pooled sovereignty. In 2017, Mr. NK Singh, the present Finance Commission Chairman wrote,

The enactment of the Goods and Services Tax (GST) legislation is a watershed moment in our federal polity. The constitutional amendment and the enabling four GST bills enacted by Parliament is the first instance of pooled sovereignty .

Pooled sovereignty implies that for enhancing overall economic and social welfare, Parliament and state legislatures vacate some space in favour of a designated entity.

This is the first time that we have invoked the principle of pooled sovereignty. India has always been a common political entity, and as it moves towards a commercial union, the idea of pooled sovereignty should be embraced and broadened to other outstanding federal issues like sharing of natural resources .

Speaking recently at a meeting organised by RBI, Mr. Singh said,

In the States that we have visited being part of Finance Commission, the States have often complained that the fiscal autonomy has been circumscribed by the GST and the room for manoeuvre on revenues had been greatly circumscribed. It is a case of pooled sovereignty for the Betterment of Common Good. Nonetheless, GST Council is still in its nascent phase and needs to revisit its design and decision making process in a more fundamental way. This is also necessary to enable it to fulfil its original purpose .

GST is the best…

Five months ago a former Chairman of CBIC wrote,

The Centre showed remarkable maturity in willing to take the revenue risk and guaranteeing to the states any possible consequential shortfall for five years by incorporating the assurance in the constitutional amendment itself. This, in a microcosm, is the story of GST- the many concessions which the Centre and the states have been willing to give in order to get GST up and going, to ensure it works.

It has reduced the cascading effect of taxes, cut down compliance, logistics and transportation costs, given India a common economic market, and provided a technology driven tax system- in short, truly created one nation, one tax, one market.

It has resulted in the creation of a unique body, the GST Council. Enshrined in the constitution, the GST Council is an embodiment of pooled sovereignty, of cooperative federalism, and an outstanding success. The GST Council has been responsive - a fault, if at all, being that it has been too much so.

Until next week