As GST Compensation Period Nears End, SC Ruling Reignites Centre-State Tax Chasm  

The end of this month marks the end of the contentious five-year period for goods and services tax (GST) compensation to states from the Centre. With that, several state governments are bracing themselves for a substantial fall in their revenue from July this year, preparing to continue the seemingly unceasing battle against the Centre. 

“We have been asking the Centre to extend the period of compensation for two to five years beyond June 2022. There is no other way to prevent several states from going into bankruptcy,” a senior government official from West Bengal said. 

A senior official from the Madhya Pradesh government says that the state has been continuously demanding an extension of the GST compensation period by a few more years. “The state government’s revenue collection does not have the required growth rate. If the time period is not extended, the state would focus on alternate resources,” the official says.  

While some states are looking at a different strategy to counter the Centre’s overwhelming majority in the GST Council, the SC ruled last month that the council’s recommendations would not be binding on states and the Centre. The apex court said that the parliament and state legislatures could both equally legislate on matters pertaining to GST, reminding states that they would be well within their legal rights to opt for amendments specific to their legislation—a move that could destroy the fabric of the existing harmonised GST regime. 

“I have heard that some states are seeking a legal view on the matter. The ruling essentially reminds states that they have the constitutional authority to not abide by the GST Council recommendations. While it has always been a consensus-driven exercise, the situation has never been this dire before for states to rebel,” says another government official from West Bengal, adding that the SC ruling has reminded states that excessive centralisation also has its limits. The official also says that it has opened a new door for opposition states to make their voice heard in the council.  

Shubhankar Dam, professor of public law and governance at University of Portsmouth, England, says that the judgment makes it clear that states have a concurrent power to legislate on tax. “Of course, by definition, states have the jurisdiction to tax only intrastate trade and commerce. But the idea that this was always clear that states can (legislate if they wanted to) is incorrect. The Union has always categorically held that states do not have the power. The Union has argued before the court that recommendations of the Council are binding and if they are binding, then, by definition, the states do not have the power to deviate from what the council says,” says Dam, adding it is now clear that that they have the same power on tax legislation matters as much as the Union does.  

Ground For Rebellion? 

Dam argues that if states decide to deviate, they are legally within their rights to do so. Constitutionally, post the SC judgment, there is nothing stopping states from enacting their own taxes on intrastate trade and commerce.  

“The interesting political question here would be—can the Union prevent it without resorting to a constitutional amendment? I have no doubt that the Union will, at some point, attempt to bring an amendment to undermine this judgment,” he opines.  

M Govinda Rao, chief economic advisor of Brickwork Ratings and member of the 14th Finance Commission, in an article in The Indian Express, writes that taken to the extreme, the judgment could open a can of worms. “In effect, decisions on the structure and operation of the tax can be made by the Centre and individual states without discussion and deliberation in the Council and both can ignore any recommendation made by the Council.” 

He says that the judgment reiterates that the sovereign right to levy GST still exists with the Union and state governments and it is for them to consider the recommendations of the council. “In other words, the chance of having a harmonised GST and reforms in the tax regime will crucially depend upon continued negotiation and bargaining between the Union and states,” he writes. 

Paragraph 56 of the SC judgment reads, “If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A. Article 279A does not mandate tabling the recommendations in the legislature like the provisions in category 3, where the recommendations have to be mandatorily tabled in the legislature along with an explanatory note. Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act and IGST Act is mandated to be tabled before the Houses of the Parliament. The use of the phrase ‘recommendations to the Union or States’ indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST.” 

The Article 246A that the judgment refers to says that both Union and states have respective powers of taxation. “But the court’s judgment seems like the court is almost inviting the Union to amend Article 279A and clarify whether 246A really says what it says. Whether the Union would succeed in getting that amendment through would depend on how many states they manage to convince because it requires two-third majority from states as well,” Dam points out. 

Historical evidence suggests that states have so far not deviated from adhering to the GST Council’s recommendations. The SC judgment, however, has given states more bargaining power and leverage than before. It is to be seen now how states make use of this reminder to improve their strained financial positions. 

Persisting Blame Game 

Despite the efforts of the opposition states to bargain for an extension of the GST compensation—pegged at 14 per cent YoY growth on the base year of 2015-16 state revenues—the Centre so far has managed to avoid any discussion on the issue.  

With the Bharatiya Janata Party-led National Democratic Alliance governing 17 states and one union territory out of the 28 states and eight union territories in India, the opposition-ruled states have so far failed to build pressure on the Centre. 

The economic slowdown and the Covid-19 pandemic had already impacted states’ revenue positions. Against that backdrop, it is a double whammy for states as the compensation payout guaranteed to states ends at a time when high inflation and subdued demand conditions pose serious challenges to economic recovery.  

An MLA from the opposition party in Karnataka, on the condition of anonymity, says, “Karnataka is getting Rs 20,000 crore less in devolution and we are going to lose another Rs 20,000 crore of compensation… the BJP governments have surrendered the interest of states to their political interests. The states have not aggressively pursued (the demand for) continuation of compensation. All states are nominally making their demands but not pursuing aggressively.”  

He says that the lack of financial resources is a dire reality for not only the opposition-ruled states but also the NDA-ruled ones and hence, if the issue had been taken up aggressively, the extension of the compensation period issue could have seen a positive resolution.  

Blaming the overwhelming majority of the BJP in the GST Council, the MLA says that it will not be possible to get a decision that goes against the narrative of the Centre. “Majority opinion prevails in the GST Council. While opposition-ruled states continue to insist on the extension of the compensation period, unless aggressively backed by BJP-ruled states, this will not become a reality. Opposition-ruled states can demand all they want, but without the backing of BJP-ruled state governments, the former cannot have their way,” the MLA rues. 

With GST, states have limited avenues to generate their own revenue. States have also accused the Centre of increased use of cesses that are not part of the divisible pool of money collected by the latter. Also, the revenue buoyancy that was assumed during the implementation of the GST five years ago has proven to have been overstated. 

While some BJP-ruled states have demanded additional support on the revenue front, it is unlikely that they will pitch for an extension of the compensation period in the GST Council to lend support to the opposition states.