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GST Compensation Options

SEPTEMBER 02, 2020

By Vijay Kumar

I asked at least thirty people, "What are the two options offered by the Central Government to the States for GST Compensation?" Nobody gave me a proper answer. Everybody was vague that there's some borrowing with interest to be paid by the Centre or State.

Kerala Finance Minister Thomas Isaac tweeted,

FD = Fiscal Deficit

Clear?

The Central Government communicated a document to the State Governments to explain the whole scheme from genesis to possible execution. The document starts with,

This paper describes the two options mentioned at the GST Council meeting on 27th August 2020, with a view to enabling the States to give their preference and views thereon within seven working days.

Options have always been confusing and anything to do GST has to be jest baffling.

Some of the famous options are:

A Hobson's choice is a free choice in which only one thing is offered. Because a person may refuse to accept what is offered, the two options are taking it or taking nothing. In other words, one may "take it or leave it".

Buridan's ass is an illustration of a paradox in philosophy to a hypothetical situation wherein a donkey that is equally hungry and thirsty is placed precisely midway between a stack of hay and a pail of water. Since the paradox assumes the ass will always go to whichever is closer, it dies of both hunger and thirst since it cannot make any rational decision between the hay and water.

Morton's Fork : justifying a tax by reasoning that someone living modestly must be saving money, and therefore could afford the tax; whereas someone living extravagantly was obviously rich, and therefore could afford the tax as well.

A no-win situation, also called a "lose-lose situation", is one where a person has choices, but no choice leads to a net gain.

Zugzwang is a situation found in chess and other turn-based games wherein one player is put at a disadvantage because of his obligation to make a move; the fact that the player is compelled to move means that his position will become significantly weaker. A player is said to be "in zugzwang" when any possible move will worsen his position.

Prashant Option: Pay one rupee or face jail and unemployment.

Where does our GST Compensation option stand? Maybe all of the above. West Bengal Finance Minister Mr. Amit Mitra termed the proposals a "Hobson's choice", and said it will adversely impact states' developmental funds if they have to borrow.

The Government has explained the options as:

Option 1
Option 2

The shortfall arising out of GST implementation (calculated at Rs. 97,000 crores approximately) will be borrowed by States through issue of debt under a Special Window coordinated by the Ministry of Finance.

It will be the endeavour to ensure steady flow of resources similar to the flow under GST compensation on a bi-monthly basis.

The entire shortfall of Rs 235,000 crores (including the Covid-impact portion) may be borrowed by States through issue of market debt. The GOI will issue an OM committing to repayment of principal on such debt from Cess proceeds.

The principal on the amount under Item I above will, after the transition period, be paid from proceeds of the Cess. The States will not be required to repay the principal from any other source.

The Compensation Cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the States. The first charge on the Compensation Cess each year would be the interest payable; the second charge would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the interest and principal are paid. The Compensation Cess will be continued after the transition period until such time as all arrears of compensation for the transition period are paid to the states. The first charge on the future Cess would be the principal repayment. The remaining arrears of compensation accrued during the transition period would be paid after the principal is paid.

What is extracted above is only the vital part of the scheme - there are many conditionalities and linguistic acrobatics with lots of legalistic justification and a little arithmetic thrown in. That's how they have come up with two figures of outstanding compensation - one because of GST and the other because of GOD!

The States have a full week to respond. And they did it in the politically correct way. BJP ruled states are loudly silent, while the other states have vociferously rejected the very idea of the two options.

Again the Kerala Finance Minister concluded,

Sir, that is why the Government gave you the detailed document!

Act of God - Who is responsible?

The Government has come up with complicated data, views, figures, AG's opinion and God to determine the amount of compensation due and how to go about paying it, actually not paying it. If it was written in the Constitution and the Act and understood by everyone, that the States have to be compensated for the shortfall in their assured revenue, what was the need to consult the Attorney General?. Was it to seek his advice on how to avoid the payment?. More on AG's advice a little later.

According to the Union Government,

1. The projected shortfall for the current year would be of the order of Rs. 3 lakh crore. Against this shortfall, the compensation cess available during the year would be only Rs. 70,000 crore leaving an unmet shortfall of Rs. 2.3 lakh crore.

2. Part of this shortfall can be attributed to implementation of GST and a part to COVID-19. To project the loss of revenue due to implementation of GST, it would be prudent to assume that in absence of impact of the pandemic, the post settlement GST revenues of the States would be an increase of about 10% over the post settlement GST revenues of 2019-20.

3. Parliament obviously could not have contemplated a historically unprecedented situation of huge losses of revenue from the base-arising from an Act of God quite independently of GST implementation-affecting both Central and State revenues, direct and indirect.

Who Should Borrow?

The Government feels that:

1. The prevailing economic situation is such that Central revenues are under greater strain than GST revenue. Customs revenues are also hit by the slowdown in imports. Central expenditures are stretched not only by the pandemic response but also by the needs of national security. This is a national problem not a Central Government problem alone.

2. The question arises of who should borrow. The notion of borrowing by the GST Council is not practically or legally feasible or desirable. This leaves the options of Central or state borrowing. The Government of India faces a very large borrowing requirement this year. Additional borrowing by the Centre influences the yields on Central government securities (g-secs) and has other macro-economic repercussions.

So, it is better that the States borrow, and you have the two options mentioned above. Of course, the Government does not reveal what the macro-economic repercussions are.

So, sayeth the AG

The Central Government sought the legal opinion of the Attorney General, obviously on the legality of not paying the compensation.

The learned AG advised,

1. The States are entitled to receive the full amount of compensation during the "transition period", in accordance with the provisions of the Act, irrespective of shortfall.

2. There is no express provision in the Compensation Act for the Government of India to bear the liability of making good the shortfall. It is the GST Council which has to decide on making good the shortfall in the GST Compensation Fund, by providing for sufficient amounts to be credited to it.

3. No provision exists in the Compensation Act for extending the period of five years for payment of compensation to the States. Section 8(1) would only entitle an extension in regard to the period of the levy and collection of the Cess, beyond the period of five years, if the Council so recommends.

4. Clause (2) of Article 292 authorizes Parliament to make loans to a State, subject to any limit which may have been fixed by law made by Parliament. The entitlement of a State to borrow is set out in Article 293(1). The limitation on such right is found in Clause (3), which prohibits a State from raising any loan, without the consent of the Government of India, "if there is still outstanding any part of a loan which has been made to the State by the Government of India."

5. The GST Council can, in the exercise of its duties under article 279A(4)(h) of the Constitution, recommend to the Central Government to permit the States to borrow money, as a measure for meeting the compensation gap. It would, however, be for the Central Government to take final decision in the matter, in exercise of its authority under article 293(3) of the Constitution.

What if there was no GST and Act of God Came Calling?

Assume a situation that in the year 2020, there is no GST, but still the Act of God came calling in the name of Covid. What would have the States done? They would have asked the Centre for aid (not compensation), which would not come. What do they do? They would simply raise VAT rates and collect more taxes. Now they have no sovereign power to collect most of the taxes and so they are at the mercy of the Centre.

Instead of talking about Attorney General's opinion and God, they should find the funds and pay up. Just are the ways of God and justifiable to men.

The Kerala Finance Minister says, Full compensation is constitutional right of states.

In any case, finally it is the citizen who has to pay through left, right, centre or state.

Until next week


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