Oppn states seek GST dues redress system
These states want the Centre to borrow the money, reimburse the states in full and retire the debt from the amount raised as cess on luxury and sin goods luxury and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products.Updated: Oct 09, 2020, 07:10 IST
States ruled by parties that are not part of the National Democratic Alliance (NDA) are demanding that a dispute resolution system be set up to tackle differences over the Goods and Services Tax (GST), saying they don’t expect an October 12 meeting of the GST Council to settle an imbroglio over compensating states for an expected Rs. 2.35 lakh crore shortfall in revenue this fiscal year, three people aware of the matter said.
The 10 states have refused to accept either of two options suggested by the Centre to make up the shortfall -- borrow Rs.1.1 lakh crore (the portion of the deficit resulting from GST implementation issues) without paying either the principal or interest, or borrow the entire Rs.2.35 lakh crore (including the shortfall caused by the Covid-19 pandemic) at a significant cost.
These states want the Centre to borrow the money, reimburse the states in full and retire the debt from the amount raised as cess on luxury and sin goods luxury and sin products such as liquor, cigarettes, aerated water, automobiles, coal and other tobacco products.
The imbroglio has underscored an urgent need to put a GST dispute resolution system in place because the GST Council, which is headed by the Union finance minister and comprises her state counterparts, is unable to forge a consensus, the three people cited above said. It has happened once, on October 5, and the October 12 meeting is headed the same way, said two finance ministers of states opposed to the options, requesting anonymity.
On October 5, the GST Council put off until October 12 a decision on compensating states for the shortfall in their share of GST revenue as the 10 states balked at the suggestion that they borrow from the market to make up a part of the shortfall.
“A vote was almost certain on Monday [October 5] on this matter when the chairman deferred the matter to October 12 for more discussion. However, there is no material change in the respective positions as of now. Hence, the 10 states will demand a vote on this matter on Monday [October 12],” one of the ministers cited above said.
When the new indirect tax regime came into force on July 1, 2017, subsuming a raft of central and state levies, the GST law assured states a 14% increase in their annual revenue for five years (up to 2022) and said their revenue shortfall should be made good using the cess levied on luxury goods and sin products. The GST Council has extended the cess beyond 2022.
“It is unfortunate that the Central government is departing from the convention of consensus-based decisions in the GST Council. The new tax regime, a unique example of cooperative federalism, was launched on the premise that its decisions will be unanimous. Its first chairman, former finance minister Arun Jaitley, did live up to that. But now, the spirit of cooperative federalism is fast waning,” the first minister cited above said.
The GST Council, for the first time since its inception on July 1, 2017 resorted to a division of votes on the issue of a tax on lotteries at its 38th meeting on December 18, 2019. Twenty-one members voted in favour of imposing a uniform 28% rate on both state-run and state-authorised lotteries, seven ministers opposed the proposal and three abstained.
Kerala finance minister Thomas Isaac said the states were, in effect, being threatened by the Centre that choosing neither of the options proposed by it would mean no compensation.
“In the circumstances, if the avowed principle of consensus is not being upheld, the legal provisions for a dispute resolution mechanism within the Council should be activated without delay,” Isaac said. He also demanded the appointment of a vice-chairperson for the Council.
An email query sent to the Union finance ministry did to elicit any response on the formation of a dispute resolution mechanism and the appointment of a vice-chairman.
A Union government official said a proposal to form a dispute resolution mechanism had already been rejected. “A proposal to create a dispute settlement authority consisting of retired judges was mooted in 2011, even before the implementation of the GST regime, but it was rejected by the then Parliamentary standing committee,” he said, requesting anonymity.
“Later, the then GST Empowered Committee headed by Sushil Modi also rejected the proposal, arguing that any such authority would undermine the sovereignty of the GST Council, which essentially consists of the Centre and states and whose recommendations are binding on state legislatures and Parliament,” he added.
According to officials, the GST Council has committees such as the fitment committee, which determines the procedures to determine rates levied on various supplies, and the law committee to resolve disputes among members. The Council can also form groups of ministers (GoMs) and committees of officers to resolve any issue.
“The present situation demands urgent action and cannot be expected through a dispute resolution mechanism even if it’s established at the earliest. However, given the rise in dissent from state governments, initiating constitution of a dispute resolution body should be done for speedy resolution in future and to avoid adding to litigation before the Supreme Court,” said Ayush Mehrotra, a partner at law firm Khaitan & Co.
The law does empower the GST Council to establish a system to resolve disputes between the Centre and one or more states, said Abhishek Jain, tax partner at consulting firm EY India.
“While one of the mechanisms could be setting up of an independent judicial body, various other avenues could as well be explored. Nonetheless, a formalised dispute resolution mechanism reflects lack of unanimity,” he added, noting that the ability to reach a consensus “has been quite an applaudable feature of the GST Council” so far.