The Attorney General has opined that there is no obligation on the central government to pay the GST compensation shortfall to states and the GST Council has to decide on ways to make good any shortfall.

After the GST Council's meeting in March, the Centre sought views from Attorney General K.K. Venugopal on the legality of market borrowing to make good the shortfall in compensation fund; a corpus created from levy of additional tax on luxury and sin goods to compensate states for revenue shortfall arising from their taxes being subsumed into the Goods and Services Tax. 

 The AG has also said the GST Council has to decide on making good the shortfall in the GST compensation fund by providing the sufficient amount to be credited to it. The options before the Council for meeting the shortfall could be to rationalise GST rates, cover more items under the compensation cess or increase the cess, or recommend higher borrowing by states to be repaid by the future collections into the compensation fund.

Since raising tax or cess rates might not be feasible in the current pandemic situation, the option that remains would be each state borrowing from the market against the consolidated fund of the state to meet the shortfall in revenue.

Under GST law, states were guaranteed to be compensated bi-monthly for any loss of revenue in the first five years of the GST implementation from July 1, 2017. Under the GST structure, taxes are levied under 5, 12, 18 and 28 per cent slabs. On top of the highest tax slab, a cess is levied on luxury, sin and demerit goods and the proceeds from the same are used to compensate states for any revenue loss.

"There is no obligation under the Constitution or GST laws to make good the loss on account of natural disaster, COVID, or economic slowdown etc. because they are not related to the implementation of GST". The GST Council has to decide how to meet the shortfall in such circumstances and not the central government.

Any borrowing of the central government is upon the security of the Consolidated Fund of India. Similarly, borrowing by a state government is upon the security of the consolidated fund of the state. In either case, it would lead to increased general government debt burden and also higher fiscal deficit.

The payment of GST compensation to states became an issue after revenues from the imposition of cess started dwindling since August 2019 and the Centre had to dive into the excess cess amount collected during 2017-18 and 2018-19. The Centre had released over Rs 1.65 lakh crore in 2019-20 as GST compensation. However, the amount of cess collected during the year 2019-20 was Rs 95,444 crores.