In a letter addressed to the States, the Centre on Saturday gave assurances that it would clear their goods and services tax (GST) dues in spite of the huge deficit incurred in GST cess collection in the wake of the coronavirus pandemic, with the situation being described by Finance Minister Nirmala Sitharaman on Thursday as "an act of God". The government has stated that it looks forward to staying clear of "avoidable borrowing at the central level when it could be done at the state level" considering central revenues at present are under "great strain" due to the COVID-19 crisis.

Nirmala Sitharaman's comment became controversial and drew considerable criticism from States and Opposition parties, with Congress leader P. Chidambaram in a tweet seeking an explanation on the government's mismanagement of the country's economy before the onset of COVID-19, while hailing her as the "messenger of God". He tweeted, "If the pandemic is an "Act of God", how do we describe the mismanagement of the economy during 2017/18, 2018/19 and 2019/20 BEFORE the pandemic struck India? Will the FM as the Messenger of God please answer?". 

An online meeting will be held on September 1 by the Union Finance Secretary and the Expenditure Secretary to clarify the queries of the States on the two options suggested by the Centre:

1) States need not service debt or repay it from other sources
2) States won't have to repay the principal amount from any other sources 

The Centre in its letter said, "The government of India stands by the statement of (former Finance Minister) Shri (Arun) Jaitley and is actively working with the states to work out such an arrangement. The government of India will support extension of the compensation cess for such period as may be necessary to completely discharge any arrears of compensation,".

States were informed to arrive at a decision in regard to the options within a week's time after the GST Council held a meeting on August 27. The Centre is hard-pressed on the GST dues payment to states that have not made much revenues this year as a result of the lockdown, which was imposed nationwide in order to contain the spread of the novel coronavirus.

The letter also read, "The prevailing economic situation is such that central revenues are under greater strain than GST revenue. Direct taxes on wages and salaries are also seriously affected. Customs revenues are also hit by the slowdown in imports. Central expenditures are stretched not only by the pandemic response but also by the needs of national security. This is a national problem not a central government problem alone,". 

The letter further added, "Hence it is in the collective interest of centre and states, and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the central level when it could be done at the state level,".

"This year the Indian economy, and the global economy, is suffering from an exogenous shock, namely the COVID-19 pandemic, whose scope and scale is unprecedented in history. Parliament obviously could not have contemplated a historically unprecedented situation of huge losses of revenue from the base - arising from an act of God quite independently of GST implementation - affecting both central and state revenues, direct and indirect. Nevertheless, the operative sections of Section 7 do not make such a distinction," the government stated. "Compensation is payable for the entire shortfall (even if it is not on account of GST implementation). This position has been clarified by the Attorney General and is accepted by the central government," the letter added.

The government on Thursday said that States can choose from either of the two options based on which the compensation, borrowing and repayment will be allocated. However, the options will be applicable only for the deficit in the present fiscal or 2020-21. GST collection shortfall is Rs 2.35 lakh crore for fiscal 2021, the Centre has stated. 

As per the law governing GST, a payment has been guaranteed to States for loss of revenue in the first five years since the GST came into force on July 1, 2017. What this implies is, an assurance for compensation in regard to any financial shortfall till 2022 has already been given to states; in case they fell below 14 percent annual growth since July 2017.