Skip to main content
Browse Law School Education Taxation GST & Constitutional Changes

It was in 2011, that for the first time, the Constitution was proposed to be amended to bring in GST. However, that amendment could not be acted upon. One main reason, for the agreement not to happen between the Centre and the States on the GST design was lack of faith. This lack of faith, was duly documented by the Parliamentary Finance Committee. This lack of faith was sought to be addressed through the compensation mechanism. In 2013, the Finance Commission enacted a study. That study, which led to an Expert Committee Report on GST, described GST as a grand bargain. Bargain between the Centre and the States. 

In order to induce the States to agree to GST, it was essential that the loss of revenue on account of GST, if any, by the States was duly compensated. This was duly instituted in the 2014 Amendment Bill, which specifically provided for the Parliament to make a law whereby the Union could compensate the States. 

However, even that was not sufficient. The States did not want a mere obligation, the States wanted a Constitutional guarantee. Constitutional guarantee not less than for five years. These clauses were accepted. And finally in 2016, when the Constitutional Amendment Act was enacted, It carried a clause that the Union will compensate the States for any loss of revenue on account of GSTs implementation and this is where there was a huge change. 

There was a huge change because in 2013, when the Finance Commission report stated that there should not be a one way obligation but a two way obligation, namely while the States should be compensated for any loss, they should also be penalised if they do not act on the implementation of GST as per the proposed design. 

However, when the law was enacted it was only a one way obligation. Therefore, the law as it stands today is that the Union alone is obliged to compensate the States for any loss of revenue, but legally speaking there is no obligation upon the States to act on the advice of GST Council. 

Therefore, there is a change and this change is actually an outcome of the bargain or the grand bargain as we call, between the Centre and the States, which results in a legal position that the Union is legally obliged to compensate the States for loss of revenue because of GSTs implementation for a period of five years.