Recently, the Centre described the pandemic as an act of God and abandoned the states to bridge up GST compensation shortfalls via borrowings. Eminent Lawyer and Managing Partner of OP Khaitan & Co - Gautam Khaitan calls it Centre's Force Majeure on GST compensation.

The Centre has abandoned the states. The Onus is on the Centre and not the states says Gautam Khaitan. 'Both the options that are offered to the states to bridge the revenue gap are not viable. It is like to mortgage the future for the needs of today. It should be the Centre that must borrow and not the states,' he added.

Coercive Federalism
Indian constitutional expert and political scientist Granville Austin once said that despite a strong Centre, Indian federalism is 'cooperative federalism'. Gautam Khaitan says, 'The way things have turned out in the past, especially since the outbreak of the pandemic, it seems like it is no more a cooperative federalism, but a coercive one'.

The nation has been witnessing an economic slowdown for the past three years. In September last year, the Centre for the first time admitted problems regarding compensation payments in the 37th GST Council. Since then, there have been cascading delays in all the subsequent payouts.

'It has been almost a year since the states have been cooperative with the delays in the compensation. When it is the Centre's turn to return the favor amid one of the most difficult times, it has failed.'

Legality of Centre's force majeure on GST compensation
Black's Law Dictionary defines 'force majeure' as 'an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.'

'In Law, it is used in the contracts between two parties. In past, we have had so many natural calamities but nowhere our government invoked force majeure nor anywhere in the world any government has done this as so far as taxes are concerned, says Gautam Khaitan.

'Moreover, when there is no such provision in the GST (Compensation to States) Act, 2017, how can you invoke it. Paying compensation to the states is the statutory obligation and the Centre must not get out of it,' he added.

In the opinion of several experts, the invocation of force majeure by the sovereign can create wider implications can open up this option to others as well. Moreover, the Supreme Court in its recent judgment held that the said clause can only be invoked only in two situations non-performance due to conditions beyond control; there are no legal options to mitigate such conditions.

Amidst such unprecedented economic slowdown, the states must not be left on their own to manage their finances. As mandated, the Centre should compensate the state for the losses on account of the implementation of the GST.

With over three decades of practice in corporate law, Gautam Khaitan is a well-known lawyer. In the world of business transactions, he is known as a lead negotiator who has coordinated on a range of complex projects that require financial and legal advice.