States to pitch for dispute resolution system at GST Council meet on Aug 27

Punjab FM says not paying cess amounts to sovereign default

States will pitch for putting in place a dispute resolution mechanism in the absence of consensus over the compensation payout by the Centre at the meeting of the goods and services tax (GST) Council on Thursday. 

In what is expected to be a stormy meeting between the Centre and states, the latter will press for a vice-chairman post in the council, besides demanding full and timely compensation as “guaranteed by the Constitution of India”.

No compensation has been paid to states for the current fiscal, despite four months’ compensation falling due under the bi-monthly payment mechanism.

While the Centre will likely ask states to borrow to make up for the shortfall in compensation cess collection, states want either the Centre or the GST Council to borrow.

In the first four months of this fiscal, Rs 21,940 crore has been collected as compensation cess, which is 33 per cent lower than the previous year. Increasing the cess period by another two to five years, widening coverage of compensation cess to include more goods and services, hiking cess on existing items and market borrowing to meet the shortfall will be among the issues that will be discussed at the meeting.

Punjab Finance Minister Manpreet Singh Badal said the Centre has breached the Constitution by not paying the compensation, which amounts to a sovereign default. “We are upset that India’s finance secretary goes to the attorney general and gets a view that there is no obligation on part of government of India to pay compensation. Compensation is a part of the Constitution and I think this amounts to a sovereign default. India is not a banana republic,” he said.

Badal added that in case the Centre and states are unable to reach an agreement, there should be a dispute resolution mechanism. “This dispute resolution mechanism must be activated and if there is a refusal at that level, any state has the right to move Supreme Court and take a legal opinion. That route is always open,” he said at a press conference on Tuesday.

He also pressed for election of a vice-president from among the state finance ministers, as mentioned in the law. “Cooperative federalism can only happen if there is a vice-chairman and dispute resolution mechanism,” said Badal, who claims that the Centre owes Punjab Rs 4,400 crore in compensation.

Attorney General KK Venugopal has recommended to the Centre to allow states to borrow to meet the shortfall on the strength of future receipts from the compensation fund. Most states have opposed this.

The Centre released Rs 1.65 trillion as compensation to states for FY20, as against a cess collection of Rs 95,444 crore. 

According to an ICRA report, 26 state governments and one Union Territory (UT) have raised Rs 2.7 trillion so far this fiscal, which is a 53.1 per cent increase over the corresponding period last year. 

Harpreet Singh, partner at KPMG, said the central government would need to keep its promise on compensation as it is bound by legislation. “In the midst of a pandemic, garnering funds would be a challenge and, hence, options like increase in rate of compensation cess, increase in GST rates, market borrowings are likely to be explored,” he said.

Pratik Jain, partner at PwC India, said at this point neither increasing the rate of cess nor the ambit look like feasible options. “Centre will need to negotiate the quantum of compensation, possibly by reducing the 14 per cent annual increment and increasing the period of compensation beyond five years as initially envisaged. In the long term, we will have to find ways for the states to be more economically independent and enhance the tax base,” said Jain.