GST Compensation to States: An Ineluctable Obligation on the Union

The Central Government in the year 2020 initially refused states a recompense for both actual and notional losses in their GST revenues for FY 2020-21. While the discombobulated state governments scrambled to find legal and fiduciary justification to their demands, the Center simply cited situational expediency and lack of any obligation for its denial. It suggested that two alternatives to the states, that involved them borrowing, as the only mechanism for compensation. As the GST Council debates and the 101st Constitutional Amendment Act would collectively reveal, the Center had promised to the contrary. The obligation of maintaining a constant supply of compensation-credit to states emanates from that promise and is all the more binding given the huge sacrifice made by the States. The historically unique creation of legislative tax-fields outside of the Schedule VII and the overwhelming dominance of the Center in administering them were both premised on this future consideration to the states. The proviso to Art. 368(2) has the same outcome as its laterally inverted version, Art. 252, insofar as it crafts a contract between two vertical government-branches operating in a ‘federal market’. This, then, adumbrates the foundation of what presently prevails in American Constitutional law as the ‘anti-coercion’ principle. The promise of GST compensation then becomes a contractual obligation at a Constitutional level, eliminating any legal space of revocability otherwise available to the Center.