Non-BJP states fear sovereign default on Centre's GST compensation

In what could widen the differences between the Centre and some states over the structure of the goods and services tax (GST), finance ministers of non-Bharatiya Janata Party (non-BJP) states on Wednesday feared that the Union government may be headed for a sovereign default on compensation to them.

States are given compensation by the Centre if they don’t clock 14 per cent growth in GST revenues in a year on the base of 2015-16.

Finance Minister (FM) Nirmala Sitharaman, on the other hand, reiterated the Centre’s commitment to paying the compensation to states.

However, finance ministers of non-BJP states such as Punjab, Kerala and West Bengal said the FM refused to give a categorical assurance that states will be paid compensation on time.

Punjab Finance Minister Manpreet Singh Badal said, “We were aware that revenue position was grim but we were not aware that it was grim to an extent where the Union FM could not give assurance in the Council whether states would be paid on time or not.”

He said the situation is close to a sovereign default where the Union government is unable to pay its constitutional obligation. The state would decide by March whether to go to court or not on this issue, he said.

Abhishek Rastogi, partner at Khaitan & Co, said, “Polarisation of states and the Centre on compensation is a cause of concern which if aggravates may result in constitutional challenges before the Supreme Court.” Kerala Finance Minister Thomas Isaac said the Centre had sufficient money in the GST Compensation Fund but delayed payments since August.

He said the Council had in its minutes recorded assurance of the former Union FM Arun Jaitley, under whom the GST was rolled out, that in the case of a shortfall in the compensation fund, the Council can borrow and pay the states. The period for levy of compensation cess may then be extended from five to six years to pay for the debt.  Bengal Finance Minister Amit Mitra said the country was staring at stagflation — high inflation with stagnant growth — and there will be no compensation money after February to pay the states.