Lok Sabha Question No. 1154 (UNSTARRED), answered on 2020-09-19
Subject: Payment of GST Compensation
Ministry: FINANCE
Asked by: Y. S. Avinash Reddy

## GOVERNMENT OF INDIA MINISTRY OF FINANCE

## DEPARTMENT OF REVENUE

LOK SABHA UN-STARRED QUESTION NO.1154 TO BE ANSWERED ON SATURDAY, THE 19 TH  SEPTEMBER, 2020 BHADRAPADA 28, 1942 (SAKA)

## Payment of GST Compensation

## 1154.  SHRI Y.S. AVINASH REDDY:

Will the Minister of FINANCE be pleased to state:

- (a)  whether  the  attention  of  the  Government  is  drawn  to  the  matter  of  comments made by the Attorney General stating that it is not mandatory for the Government to pay shortfall in Goods and Services Tax (GST) compensation of the States;
- (b) if so, the details thereof;
- (c)  whether  the  Government  has  any  plan  of  stopping  the  payment  of  GST compensation to the states taking the above statement; and
- (d) if so, the stand of the Government in this regard?

## ANSWER MINISTER OF STATE IN MINISTRY OF FINANCE (Shri Anurag Singh Thakur )

- (a)  & (b):AG's opinion has been obtained about payment of GST compensation to states in the event of shortage of compensation cess collection. Brief details of the AG's opinion are as per Annexure .
- (c) &  (d):No  Sir,  GST  compensation  is  being  continued  to  be  released  as  per  the provisions  of  GST  (Compensation  to  States)  Act,  2017  out  of  the  balance  in  the Compensation Fund.

****

## Question. 1

In  case  the  balance  in  the  Goods  and  Services  Tax  Compensation  Fund  is  not adequate to meet the compensation payable under Section 7, are the States still entitled  to  receive  the  full  amount  of  compensation  calculated  as  per  the provisions of the Goods and Services Tax (Compensation to States) Act, 2017?

Opinion- 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.

## Question. 2

In  case  the  balance  in  the  Goods  and  Services  Tax  Compensation  Fund  is  not sufficient,  is  there  an  obligation  on  the  Centre  to  meet  the  shortfall  wholly  or partly?

Opinion - There is no express provision in the Compensation Act for the Government of India to bear the liability of making good the shortfall.

## Question. 3

What are the options before the GST Council, Union and States to meet the said shortfall? Can the GST Council recommend extension of period during which the compensation  for  the  transition  period  can  be  paid  to  the  States  in  terms  of Section 8?

Opinion - Where, on account of extraordinary circumstance carrying steep fall in GST revenues and a shortfall in the Fund, the states cannot be paid full compensation during the  transition  period,  the  shortfall  in  the  payment  can  be  made  up  even  after  the transition period of 5 years consequent to a recommendation by GST Council extending the levy and collection of cess beyond 5 years under section 8(1) of the Act.

## Question. 4

Can  the States borrow on the strength of the future receipts from the Compensation Fund to meet the compensation gap either fully or partially?

Opinion  -  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..'.

## Question. 5

## Can  the  GST  Council  recommend  or  request  the  Centre  to  consider  allowing States to borrow money to meet the compensation gap either fully or partially?

Opinion- 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.

## Question. 6

Apart from aforesaid, opinion of Learned AG on following was also obtained:

(i) Whether the States would be 'entitled' to any compensation beyond the transition period of five years under the Goods and Services Tax (Compensation to States) Act, 2017.

(ii) Whether, in  light  of  the  fact  that  GST  Revenue  would  be  down  by  Rs.2.5 lakh crore as compared to what it would have been without COVID and in such extraordinary  circumstances  when  the  entire  world  is  facing  an  economic downturn due to the impact of Covid-19 on the economy and the amounts in the GST Compensation Fund is not adequate to pay the States, can it be and said that while the entitlement of the States to receive the full amount of compensation is payable for the 'transition period', however, the levy and collection of cess and payment  of  the  shortfall  compensation  can  be  extended  beyond  5  years  in accordance with Section 8(1) of the Goods and Services Tax (Compensation to States) Act, 2017 and Article 279A of the Constitution?

(iii) Whether, instead of taking consent of all States for the purpose of deferring the  payment  of  the  shortfall  compensation  under  the  Goods  and  Services  Tax (Compensation to States) Act, 2017, the recommendation of the GST Council in the form of a decision of the majority of the Council as provided in Article 279A(9) of the Constitution  would  be  sufficient to defer the payment  of  shortfall compensation in the extra-ordinary circumstances such as the present?

Opinion  -  (i)  The  compensation  under  the  Act  is  payable  to  the  States  during  the transition period (i.e. 5 years); and

(ii) Such payment shall be made from the Fund, into which the proceeds of the cess are credited.

(iii) GST  Council  would  recommend  the  continuance  of  the  cess  beyond  the transition  period  of  5  years  only  in  a  situation  of  shortfall  during  the  transition  period, which would necessitate the raising of funds for paying the compensation to the States after the 5 year period is over.

On  account  of  any  extraordinary  circumstances  causing  a  steep  fall  in  GST revenues and a shortfall in the Fund, the states cannot be paid full compensation during the  transition  period,  the  shortfall  in  the  payment  of  compensation  could  be  made  up even after the transition period of 5 years.

A recommendation by the GST Council extending the levy and collection of the cess beyond 5 years under Section 8(1) of the Act, would require a decision by a threefourth majority of the weighted votes.