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, sources said.
After the GST Council's meeting in March, the Centre had sought views from Attorney General K K Venugopal -- who is the chief legal officer of the government -- on the legality of market borrowing by the council to make good any shortfall in the compensation fund.
The AG in his view said there is no obligation on the central government to pay the GST compensation shortfall, according to the sources.
The AG also said the GST Council has to decide on making good the shortfall in the compensation fund by providing the sufficient amount to be credited to it.
The payment of GST compensation to states became an issue after revenues from imposition of cess started dwindling since August 2019 and the Centre had to dive in to the excess cess amount collected during 2017-18 and 2018-19.
Under the Goods and Services Tax (GST) law, states were guaranteed to be compensated for any loss of revenue in the first five years of the GST implementation from July 1, 2017. The shortfall is calculated assuming a 14 per cent annual growth in GST collections by states over the base year of 2015-16.
The compensation is to be paid bi-monthly by the Centre to the states from cess collected.
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.
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 crore.
The compensation payout amount was Rs 69,275 crore in 2018-19 and Rs 41,146 crore in 2017-18.
Sources said the Constitution provides for GST compensation to states for loss of revenue on account of GST implementation.
"However, 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 implementation of GST," a source said.
The GST Council has to decide how to meet the shortfall in such circumstances and not the central government, the source added.
While many states had demanded that compensation be paid from the Consolidated Fund of India (CFI), Parliament had in 2017 rejected an amendment which proposed to put an obligation on the central government to pay from CFI to meet the GST compensation shortfall.