Why a force majeure clause does not apply to the Compensation to States Act?
In the GST council meeting held on 27th August 2020, Union Corporate Affairs and Finance Minister, Nirmala Sitharaman attributed the shortfall in GST collections to disruptions occurring due to the Covid-19 pandemic and called it an Act of God causing quite a stir among netizens. In legal context, an “Act of God” is a natural unforeseen circumstance. On the other hand, a force majeure clause has a wider scope or ambit and includes both natural and man made calamaties or disruptions.
When the Goods and Services Tax was first introduced in 2017, it was after several debates and discussions. It had been quite a task to have all States agree to a common slab taxation system. Our States had been competing with each other for a long time and tax rates differed between States - while this ensured higher individual collection revenues, it led to several pain points for the taxpayer who was figuratively jumping through hoops navigating through our taxation system. The tipping point in convincing States to switch to GST was the Compensation to States Act, a five-year revenue protection guarantee with an assured 14% increase on top of GST revenues. But nobody in the world could have foreseen a situation like the Coronavirus pandemic, so theoretically, it can be argued that States do not have to be fully compensated basis the Act of God or Force Majeure clause.
But that’s where this argument stops. At theory. Because, such a clause wouldn't technically be applicable to the Compensation to States Act. Why not? Because the compensation to States for shortfall in GST revenue is not part of any contract. It is a legal commitment that has risen from a political agreement made through an Act. Now obviously, the Parliament has the power to scrap this Act but doing so, will figuratively open up a can of worms. There have been a lot of issues under GST that were resolved and scrapping this act could unravel them again.
So, the Centre presented the States with two options during the 41st GST council meeting on August 27th. The Centre facilitates availing of loans for the States through the Reserve Bank of India, but only for that portion arising out of GST implementation. Meaning, the Centre will provide a special window to States, in consultation with the RBI to provide the ₹97,000 crore at a reasonable rate of interest. This loan can be repaid after five years from collection of cess. Additionally, the gap arising in compensation due to the extraordinary situation and Act of God in the form of COVID-19. This means a State will borrow less, but their compensation entitlement will be protected. Alternatively, they can borrow more and pay for it using cess collected during the transition period.
States are expected to review these options and revert to the Centre soon and only then we shall know whether our economy will survive this pandemic.
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