GST Revenue sharing Centre Vs States

The distribution of GST proceeds has triggered a new flashpoint in Centre-state relations amid fresh indications of delayed compensation payments and dues to the states.
While the Centre on Monday released Rs 13,806 crore to the states for March 2020, wrapping up the full payout for FY20 at Rs 1.65 lakh crore, compensation payments for this financial year since April remain pending.
Key Finance Ministry officials are reported to have briefed the Standing Committee on Finance Tuesday about the Centre’s inability to pay states in the near future.
Punjab has responded by flagging the need for “timely GST payments”, stating that four months of pending dues are equivalent to two months of salaries bills of the state.
Kerala has described the reported statement by Ministry officials as a “brazen betrayal of federal trust”.
West Bengal Chief Minister Mamata Banerjee wrote to Prime Minister Narendra Modi earlier this week, urging the Centre to release GST compensation worth Rs 4,135 crore for April and May.

Why there has been issue over GST compensation?

The concerns started surfacing in October last year, when the payments to states got delayed as GST revenues came in lower than expected.
The Covid-19 pandemic has deepened the economic slowdown and impacted revenues, with GST collections recording a 41% decline in the April-June quarter.
As the amount to be paid to states started rising with a compounded 14% rate even as compensation collections remained around the same level for two consecutive years, the high 14% rate has been viewed as delinked from economic realities.
For instance, in the ongoing financial year, the SGST (state GST) revenue for June has been Rs 23,970 crore, while monthly protected revenue is Rs 63,706 crore, leaving a gap of Rs 39,736 crore
The Centre has cleared compensation dues for FY20 of Rs 1.65 lakh crore, while the collection under the compensation cess fund was only Rs 95,444 crore,
Implying the payments were over 70% higher than the collection.

How centre managed this?

The gap was partly bridged by money from the compensation fund that had remained unutilised in the first two years of GST,
Along with Rs 33,412 crore that was ploughed back from Consolidated Fund of India to the compensation fund.
Now, compensation payments to states are pending since April.

GST compensation fund

At present, the cess levied on sin and luxury goods such as tobacco and automobiles flows into the compensation fund.
In the GST Council meetings in early 2017, states had suggested alternative sources of revenue for the compensation fund in case of a shortfall.

Options available to meet the compensation gap?

Market borrowing has been discussed in the GST Council as one of the possible solutions.
But there are differing views among states on the Council itself resorting to market borrowing.
While Kerala backs such a move and Bihar opposes it.
There is also an emerging view among states in favour of hiking the GST rates or restructuring the GST slabs.
The states, however, agree that tinkering with the rate structure needs to be done only after the effects of the pandemic-induced slowdown wear off.
Hiking the cess rate or lowering of the guaranteed compensation rate have featured in the discussions of GST Council meetings,
But states are not in favour of either option.

Is centre legally liable?

Though it does not appear to be legally liable,
It has a moral imperative to do so,
Even if the guaranteed rate of revenue of 14% is inordinately high in the present COVID led economic downturn