Against the backdrop of the Finance Minister directing the State governments to approach Reserve Bank of India and raise loans for the GST revenue shortfall for the States citing ‘act of god’ as a reason, necessitated to explore into the origin and mechanism of the Goods and Services Tax Act.

The (One hundred and first amendment) amendment to the constitution empowered the parliament and the State legislatures concurrently to make laws for levying GST on supply of goods and services on the same transaction. Accordingly the parliament passed Central General Sales Tax (CGST) Act, 2017 for levying tax on Intra-State Supply of Goods and Services and Integrated General Sales Tax Act (IGST Act) for interstate supply of goods and services, Union territory GST (UT GST Act) and the Goods and Services Tax Act (compensation to states) Act, 2017 for providing compensation to the states during the process of implementation of Goods and Services Tax Act.

By the said Hundred and first amendment, Article 246-A, and Article 269-A were incorporated in the constitution along with other amendments. Article 246-A which is the newly inserted Article contemplates that the legislature of every state has power to make laws with respect to goods and services tax imposed by the Union or by such state and the parliament has exclusive power to make laws with respect to goods and service tax where the supply of goods or of services or both takes place in the course of inter-state trade or commerce. Article 246 of the constitution contemplates that the parliament only has exclusive power to make laws with respect to any of the matters enumerated in the list-I in the seventh schedule. The said Article also contemplates that the parliament and the legislature of any state has power in respect of the matters enumerated in the concurrent list.

Similarly Article 269-A contemplates that the goods and services tax on supplies in the course of inter-state trade or commerce shall be levied and collected by the government of India and such tax shall be apportioned between the Union and the states in the manner as may be provided by the parliament by law on the recommendation of goods and services tax council. Article 269 contemplates that certain duties and taxes levied and collected by government of India shall be assigned to the States in the manner provided in sub clause 2.

The Hundred and first amendment of the constitution also by incorporation of Article 279-A empowers the President to constitute a council to be called as the goods and services tax council. The said council is empowered to make recommendations to the Union and the States with regard to various aspects regarding levying and apportionment. The said Article also stipulates various aspects relating to which the council shall make recommendations and deal with. Simultaneously anticipating that the state governments would sustain certain loss of revenue during the period of transition while implementation of the Act, the parliament had enacted, the goods and service tax (compensation to the states) Act, 2017. A reading of the said Act shows that the same is enacted to provide compensation to the states for the loss of revenue arising on the account of implementation of the goods and services tax in pursuance of the provisions of the constitution (One hundred and first amendment) Act, 2016. Section 7 of the said Act specifically contemplates that the compensation shall be paid to any state during the transition period for the shortfall of the collection of the revenue. Sec.2(r) defines transition period means a period of five years from the transition date and as per Sec.2(q) transition date means the date on which the state goods and services tax Act of the concerned state comes into force. Almost all the state legislations were enacted in the year 2017 and therefore the transition period shall be up to July, 2022 and during this period if there is any short fall of revenue to the states the same shall be compensated by the central government.

The liability of the central government to compensate the states in case of short fall of revenue is a statutory liability under the central Act i.e., the goods and services Act (compensation to states) Act, 2017. The said Act does not specify any conditions absolving the centre from payment of such compensation.

The Indian contract Act, 1872 contains two provisions i.e., Sec.32 and 56 which relate to inability to perform a contract basing on happening of a future event. The parties to contract may incorporate such a condition in the contract which is generally called ‘force majeure’ clause and if incorporated in the contract, the party which cannot perform its obligation under the contract due to any unforeseen event may invoke the said clause. Only the parties under the contractual obligations may be entitled to invoke such clauses if specified in the contracts and the same binds both the parties to the contract. The application of concept of ‘force majeure’ or an Act of god is purely within a contractual domain i.e., obligations arising out of contract. The said principle cannot be made applicable to the liabilities arising under a statute unless and until such a statute provides for any such concept.

The concept of ‘force majeure’ originated from Roman law which recognised the principle that the obligations under a contract are binding so long as the situation existing at the time the contract was entered into fundamentally remains the same. The said term refers to an event or effect that can be neither anticipated nor controlled. It is purely a contractual provision contained in the contracts and the inter-se rights between the parties to the contract are governed by only the terms and conditions contained therein. A contractual obligation is different from a statutory obligation. In the present dispute between the states and the centre with regard to providing the compensation, the same has to be viewed in the light of a statutory obligation created by virtue of amendment of the constitution. Therefore directing the states to approach the reserve bank for availing loan instead of providing compensation as envisaged the goods and services Act (compensation to states) Act, 2017 may not be a correct approach. The concept of avoiding obligation to pay the compensation citing ‘act of god as a reason’ would be in breach of the provisions contained in the goods and services Act (compensation to states) Act, 2017.

By Chittarvu Raghu, Advocate,
High Court’s of A.P. & T.S.
[email protected]