AUGUST 05, 2020

By Vijay Kumar

Central Sales Tax (CST) Compensation

In his Budget Speech on 29.02.2008, the then Finance Minister Mr. Chidambaram stated,

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.

In his budget speech on 28.02.2013, (Mr. Chidambaram was still the Finance Minister), he said,

There is need for the Centre to compensate the States for loss due to the reduction in the CST rate. Hope inspires courage.

I propose to take the first decisive step by setting apart, in the Budget, a sum of Rs. 9,000 crore towards the first instalment of the balance of CST compensation. 

Obviously, he was not very keen to compensate the States.

On 07.08.2015, the Minister of State for Finance, Jayant Sinha informed Parliament,

The Empowered Committee had recommended to pay 100% CST compensation for year 2010-11, 75% CST compensation for 2011-12 and 50% CST compensation for 2012-13. Union Cabinet in its meeting held on 17.3.2015 had approved payment of CST compensation to the States for the financial years 2010-11, 2011-12 and 2012-13 as per EC recommendation. Accordingly, Central Government (Department of Revenue) has released total Rs. 17,118.02 crore towards payment of CST compensation to the States/UT's for the year 2010-11.

CST compensation to the states/UT's for year 2011-12 is proposed to be paid in two installments in Financial Year 2015-16. CST compensation for the states for 2012-13 will be paid in 2016-17.

Provision of Rs. 15,028 crore has been made in BE 2015-16 for payment of CST compensation to the States/UT's for the year 2011-12.

Earlier on 10.12.2014, the then Finance Minister Mr. Arun Jaitley had told the Lok Sabha,

Let me Sir, with your permission, make the following statement so that it is quoted correctly: 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.

On the first anniversary of GST on 1 st July 2018, Mr Jaitley wrote

Firstly, the UPA Government lost the confidence of the States, including the Congress ruled States. In a move towards the single tax system, the UPA asked the States to abolish the CST. It promised the States that it would give them a compensation in lieu of the CST for a certain number of years. The States acted accordingly, abolished the CST and the Central Government owed the States several thousand crores as CST compensation. When the States demanded CST compensation, the Centre would look the other way. When I took over as the Finance Minister in May 2014, all the States, including the BJP ruled States, told me that they don't trust the Central Government because of what the UPA Government had done. They will discuss GST only if past CST compensation is paid. I conceded that the UPA let down of the States was unacceptable and in order to bridge the trust, despite pressures on the Central revenue, I will clear the arrears of the Central CST. I, accordingly, did that. The CST compensation was paid. The States were then willing to come to the table and move further on the GST.

Onto GST Compensation:

Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, stipulates,

18. Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years .

Accordingly, Parliament passed the Goods and Services Tax (Compensation to States) Act, 2017, by which States are to be compensated if their revenue growth is not more than 14% compared to the base year 2015-16.

A compensation Cess is levied for the purposes of providing compensation to the States for loss of revenue arising on account of implementation of the goods and services tax, for a period of five years or for such period as may be prescribed on the recommendations of the Council.

Now, the problem comes. What happens if the Central Government runs out of money to pay the compensation to the States, as is the position today. The Office of Mr. Anurag Thakur, Minister of State, Finance tweeted,

Centre Released Rs. 1,65,302 Crore as GST Compensation to States/UTs for the FY 2019-20 against cess collection of Rs. 95,444 crore.

To release compensation for 2019-20, balance of cess amount collected during 2017-18 and 2018-19 was also utilised.

Centre also transferred Rs. 33,412 cr from CFI to Compensation Fund as part of an exercise to apportion balance of IGST pertaining to 2017-18.

So, now the position is that the Central Government does not have enough money to compensate the States as the Cess did not bring in sufficient revenue. What to do? Borrow, deny, discuss - several options are being floated. It is reported that the Finance Secretary has stated that the Centre cannot pay the compensation and the Attorney General has advised that the Centre is not legally bound to pay.

Kerala Finance Minister Mr. Thomas Isaac tweeted,

According to news reports the hearing before Standing Committee on Finance, Centre has taken the stand that GST Compensation can't be paid and present arrangements be revised by Council. Such a brazen betrayal of federal trust! Convene the Council meeting immediately as promised.

AG opinion seems to be that if there is no money in Cess Fund it's is upto GST Council to make appropriate arrangements. Fine. But Centre has 1/3rd votes in Council. No decision can be taken without its concurrence. So, the question is, what is its stance? To pay or not to pay?

It is reported that Punjab Finance Minister Manpreet Singh has written to Union Finance Minister,

The recent reports in the national media that Central Government has informed the Parliamentary panel that it has neither the money nor the obligation to pay GST compensation to States has come as a complete shock to Punjab. Punjab is already operating with a deficit in excess of 45%, the highest among the general category states. With the current pace, this is likely to exceed 60% by the time period of assured compensation is over.

Gift, Statute or Trust

Now, we have a real crisis. Neither the Constitution, nor the Compensation Act, visualised a situation when the government at the Centre has no money to pay the compensation and the States can merrily enjoy an assured 14% increase in their GST kitty with or without actual collections. It is reported that the matter is to be discussed in the GST Council meeting. What is there to discuss? The Constitution and the Act require the centre to pay the compensation. To go back on the constitutional guarantee, will be a big blow to co-operative federalism.

Mr. Chidambaram did not pay the CST Compensation, which Mr. Arun Jaitley paid only to create a new compensation, which his successors are not able to pay. Mr. Jaitley said that a major impediment in the implementation of the GST has been the trust deficit between the States and the Centre. Should we wait for another impediment for the GST compensation to be paid?

From a former Chairman, CBIC .

Mr. Najib Shah was the CBIC Chairman just before GST was launched and was so, closely associated with its creation. In our recent webinar on "three Years of GST", he said that,

https://youtube-cutter.org/video/HY8eU21n2

Until next week