Kerala’s Stand on GST Compensation Deserves Full Support

While addressing an important press conference on 29 August, the Finance Minister of Kerala Thomas Isaac said that the Centre must take out loans in order to fulfil its commitment to pay the states their due GST compensations. This, Isaac has forthrightly said, is a rejection of the Centre’s position, which it has made clear at a recent GST Council meeting. The Centre has said that the states must do the borrowing to resolve the financial crisis caused by non-payment of GST dues, and that the Reserve Bank of India would be part of the process.

Isaac has already said that his proposal has the support of not only the Chief Minister of Kerala Pinarayi Vijayan, but of several other chief ministers. This was confirmed at the GST Council meeting, at which several states said that the Centre must be the one to borrow funds and disburse it among states. Isaac has also said that Kerala will take the lead in trying to build a consensus among as many states as possible on this issue.

One widely-discussed aspect of the resource crunch of recent times is that the Union government has not yet paid the constitutionally-mandated Rs.1.5 lakh crore GST compensation due to states for April to July in current fiscal. The total shortfall in GST compensation to states is officially estimated at Rs.2.35 lakh crore, of which Rs.97,000 crore is estimated on account of “GST implementation” and the remaining to Covid-19 related factors.

Several state governments have opposed the denial of funds as they are guaranteed to them in exchange for accepting the GST agreement, which redraws the earlier federal arrangement. The denial of dues by the Centre has been called unconstitutional by Isaac. Similarly, the Finance Minister of Punjab Manpreet Singh Badal has said, “In the seventh meeting of the GST Council the Chairman observed that it was the constitutional commitment of the central government to provide cent per cent compensation…Cooperative federalism has been transformed into coercive federalism.”

Kerala’s position is likely to garner widespread support as states now have to bear a number of additional responsibilities while their revenue position has declined significantly. This is due to a number of factors, of which one of the most important is that the Centre has not fulfilled its GST-related obligations. States had given up some of their autonomy for the greater common good of a unified tax system sold by them to the Centre, and because they were assured that their losses would be compensated for losses in the early years. Now that the compensation has not come through, the ability of states to meet their welfare and development obligations, and even to meet regular administrative functions, are likely to be very adversely affected. This is an issue with massive implications especially for ordinary people, particularly the poor.

Many states have hardly any space for increasing capital expenditure, while some have reported problems in making salary payments. The present crisis comes on top of the already worsening debt situation of many states. The debt burden of state governments has doubled during the last five years, and is estimated to be around Rs.50 lakh crore. The Reserve Bank of India has expressed serious concern over the fast-increasing debt.

In addition, the Union Finance Minister Nirmala Sitharaman has described the ongoing viral pandemic as an “act of god”. This is already being questioned and even lampooned. The reason is that the minister is conveying that the pandemic is beyond human control, and therefore the government cannot be held accountable for any disruptions caused by it. This is clearly not a rational view and lacks scientific basis. The causes of any pandemic are within the ambit of scientific explanation and its rapid spread even more so. Calling it an “act of god” amounts to denying the need for rigorous and detailed scientific inquiries into it causes and the nature of its spread.

Is the description of the Finance Minister the accepted official view of the government of India on the pandemic? If it is not, then this should be clearly stated by the Centre.

Even if we accept for the sake of argument that the pandemic was beyond human control, we still have to reckon with the fact that different responses to Covid-19 have led to very different outcomes on both economic and social life in different countries, even regions within the country. This is due to the very important factor of policy and how it was wielded to tackle the spread of the virus.

One interpretation of the phrase “act of god” is strictly legal. It is as a clause used in private contracts to secure indemnity or exemption against fulfilling the contracted terms in case events beyond control take place. However a legality relating to private contracts cannot be applied to democratic federal relationships, nor to constitutional obligations. As Badal has said, “The constitutional framework that ushered in the GST does not provide an escape clause for ‘Acts of God’.”

In some countries, the distress caused by Covid-19 remained moderate due to their better healthcare management while in others, including India, the disruptions are among the worst in the world.

In India’s context, we need to ask the Centre whether the prolonged lockdowns it imposed, which had millions of migrants take extremely painful journeys on foot were based on evidence and rationality. Clearly they were not, as the highly-restrictive conditions imposed by the lockdown proved counter-productive.

For all these reasons, and in the interest of justice and trust-based federalism, the government cannot use an imagined act of god as a reason to not meet previously-settled obligations to states on GST. The states are heavily burdened by the tendency of the Union to shore up revenues by imposing cess upon cess, whose proceeds are not shared with states. It is equally telling that the Centre is not exercising a number of other options to raise revenues—such as increasing tax on the richest persons, including a wealth tax, and the biggest corporates. In these times of economic difficulties, the government must remember its forgotten promise of bringing back billions of rupees stashed in foreign accounts.

Last but not least, the Centre can improve its finances by dropping wasteful projects, as can many state governments which have saddled themselves with wasteful and ecologically and socially disruptive schemes and plans. Many such projects are being pushed whose benefits accrue to narrow interest groups at the cost of the exchequer and citizens.

India has to think not only of this fiscal year but of coming years too. If the burden of borrowing is placed on states, it will merely worsen their position in years to come. The Union has more options available to raise revenues, and so the Kerala government and its Finance Minister must be heard: the Centre should take out a loan and provide GST compensation.

The writer is a freelance journalist who has been involved with several social movements. The views are personal.