Virtual-RKCMUN-II-2020

Letter from the Executive Board

It is an honor for us to welcome all of you to The United Nations
Environment Programme of RKC MUN 2020. As you may know,
UNEP is responsible for the UN's environmental activities. UNEP
aims to help the world meet the 17 Sustainable Development Goals.
We hope that this committee will be immensely rewarding as an
enriching experience within International Politics.

We, the EB, will be monitoring and moderating the flow of debate
inside the committee. We encourage delegates to not be afraid to
adopt brave stances and throw out bold ideas in debate, and we very
much look forward to what you’ll come up with. The acceptable
sources of information in the levels of credibility are as follows:

1. All UN websites
2. The Country’s official website

3. International Newspapers such as Reuters, BBC, Al Jazeera

Delegates are expected to report to each committee session on time
and maintain it’s decorum. We also expect delegates to be well versed
in their country’s foreign policy and stance on the agenda. We hope
that the committee has good debates resulting in innovative and
substantive solutions

For any further queries, feel free to contact the EB at

[email protected]

Regards,

Pratham Simaria (Chair)

Aastha Gajera (Vice-Chair)

Committee Overview

The United Nations Environmental Programme (UNEP) was founded
by Canadian businessman and philanthropist Maurice Strong, its first
director, in June 1972 as a result of the Stockholm Conference on the
Human Environment. The UNEP is the main coordinating body for
the environmental activities under the United Nations.

UNEP has played a significant role in identifying and analyzing
global environmental problems, developing regional and international
environmental programs and conventions, and promoting
environmental science and information. The United Nations
Environment Programme is the leading global environmental
authority.

UNEP primarily, sets the global environmental agenda and promotes
the coherent implementation of the environmental dimension of
sustainable development within the United Nations system and also
serves as an authoritative advocate for the global environment.

Our mission as the UNEP is to provide leadership and encourage
partnership in caring for the environment by inspiring, informing, and
enabling nations and peoples to improve their quality of life without
compromising that of future generations.

UNEP’s mandate covers a wide range of areas, including the marine
and terrestrial ecosystems, green economic development, the
atmosphere, and environmental governance. As a member of the
United Nations Development Group, UNEP aims to help the world
meet the 17 Sustainable Development Goals.

One of its most important tasks is assisting developing countries in
implementing environmentally sound policies and practices.

Over the last thirty years, it has increasingly focused on climate
change, helping create or implement environmental treaties and
institutions, such as the UN Framework Convention on Climate
Change. In 1988, it joined the World Meteorological Organization to
establish the Intergovernmental Panel on Climate Change (IPCC), a

leading authority on the science of climate change and options
for adaptation and mitigation.

Introduction

During the last few decades, climate change has been one of the most
important topics for the United Nations. Climate change represents a
tangible issue because its effects have an impact on livelihoods and

well-being, forcing individuals to adapt to new realities, limited
resources, and complex social contexts.
This is the case of sea-level rise in low-lying areas and small islands,
given that territory and biodiversity are being affected, as well as
daily human activities.
Small island states are the most vulnerable of all coastal areas to
global climate change and accelerated sea-level rise.
As sea levels continue to rise, island peoples and cultures are being
threatened. There are small and low populated islands that don’t have
the money to protect the island. People from those islands may not
have the resources to move off the island.

These problems will only worsen as the coastal impacts of land
submergence, beach erosion, increased storm flooding, high water
tables, and reduced freshwater supply take their toll.

Such changes will make these small landmasses, many at or near the
existing sea level, less habitable for humans. The threat posed by
rising sea levels has been the centerpiece of climate change
negotiations at the UN, the main issue emphasized by Small Island
Developing States, also known as the SIDS.

Efforts to combat these environmental changes are ongoing and
multinational. Particularly notable is the adoption of the Paris
agreement at the UN Climate Summit in 2015.

Causes Behind the Rising Seas

Sea level rise is caused primarily due to two factors related to global
warming: the added water from melting ice sheets and glaciers and
the expansion of seawater as it warms.

Between 2002 and 2016, Antarctica lost 125 gigatons of ice annually.
It contributed 0.013 inches of sea-level rise per year.

Antarctica holds 90% of the world's ice. If all of it melted, it would
result in the rise of sea levels by 200 feet. The global average sea
level rose roughly eight inches from 1880 - 2009.

Land ice: glaciers, ice caps, and ice sheets are shrinking at a faster
rate in response to rising temperatures, adding water to the world's
oceans.

The rate of ice sheet melting is accelerating. Between 1992 and 2017,
Antarctica shed 3 trillion tons of ice. It increased sea levels by three-

tenths of an inch. But 40% of that occurred during the last five years,
from 2012 to 2017.

The worst prediction of all comes from looking at the Earth the last
time greenhouse gas emissions were this high. Carbon dioxide is 411
parts per million. The last time it was this high was during the
Pliocene era.

Back then, the sea level was 66 feet higher. Again, it takes time for
the temperature to rise in response to greenhouse gases. However,
until and unless the emission of greenhouse gases is reduced, the
temperature will continue to climb.

Effects and Threats of Sea level rise on
Island nations

As coastlines rise, as strategic straits widen, countries everywhere will
find their maritime boundaries shifting. Most of these changes are not
great in terms of territory, but difficult issues of national pride and
control could be at stake, but for some the changes are significant.
For some—especially low-lying countries, many of the island
states—the changes will be overwhelming.

A major region affected by rising sea levels is the Arctic Ocean,
where the ice melting reveals not just previous inaccessible coastlines,
but opens a previously shielded region to trade, exploitation, and great
power conflict.

The poorer countries flanked by large bodies of water -- who have
contributed the least to global warming, including rapid sea-level rise
-- now find themselves at the precarious mercy of the historical
polluters.

The dangers of climate change and sea-level rise may be worse for
low-lying states, including many small island countries. Many are in
danger of losing territory.

Some are at risk of disappearing entirely. Their people face the loss of
livelihoods, displacement, and the fate of watching their homes
disappear.

The international community has yet to face the consequences; the
loss of territory, the expansion of seas, the shifting of maritime
borders, human suffering, and the rise of massive new waves of
indigent people forced to migrate. As a result of climate change.

On the other hand, Pacific islanders are running out of time. If global
emissions are not drastically reduced, thousands of low-lying atolls
may become uninhabitable within decades.

And the biggest threat doesn't come from losing land to rising seas.
There are many secondary effects of climate change and sea-level
rise, particularly to island nations.

According to the US Fish and Wildlife Service, climate change in the
Pacific Islands will cause “continued increases in air and ocean
surface temperatures in the Pacific, increased frequency of extreme
weather events, and increased rainfall during the summer months and
a decrease in rainfall during the winter months.”

The Maldives

The Maldives are a cluster of far spread, low-lying islands, and atolls
located in the Indian Ocean. As the flattest country on Earth, the
Republic of Maldives is extremely vulnerable to rising sea level and
faces the very real possibility that the majority of its land area will be
underwater by the end of this century.

Today, the white sand beaches and extensive coral reefs of the
Maldives' 1,190 islands draw more than 600,000 tourists annually.

Sea level rise is likely to worsen existing environmental stresses in
the Maldives, such as periodic flooding from storm surge, and a

scarcity of fresh water for drinking and other purposes.

Rising seas pose a looming threat to homes and industries near the
coast. Even small increases in sea level are likely to worsen existing
environmental challenges on the islands, such as persistent flooding
from waves often generated by storms far away.

More than 90 of the inhabited Maldives islands experience annual
floods. In 2007, a series of swells forced the evacuation of more than
1,600 people from their homes and damaged more than 500 houses.
After looking closely at the volume of water that could come from
glacial and ice sheet melt by the year 2100, scientists estimate that sea
level could rise 2.6 feet (80 centimeters) and that as much as 6.6 feet
(2 meters) are possible, depending on the pace at which heat-trapping
emissions are released.
Given mid-level scenarios for those emissions, the Maldives is
projected to experience sea-level rise on the order of 1.5 feet (50
centimeters) by around 2100. The country would lose about 77
percent of its land area by 2100.
If sea level were to rise by 3.3 feet (1 meter) and the Maldives did not
pursue further coastal protection measures, it would be nearly
completely inundated by about 2085.

To prepare against climate change and the resulting sea-level rise, the
national government of the Maldives has prepared a comprehensive
National Adaptation Programs of Action that attempts to critically
consider and alleviate many of the serious threats the Maldives faces.

Marshall Islands

The Marshall Islands are a collection of low-lying islands and atolls in
the middle of the Pacific Ocean, all less than six feet in average
elevation.

For thousands of years, Marshallese have embraced their watery
environment, building a culture on more than 1,200 islands scattered
across 750,000 square miles of ocean.
But powerful tropical cyclones, damaged reefs and fisheries,
worsening droughts, and sea-level rise threaten the coral reef atolls of
this large ocean state, forcing the Marshallese to navigate a new
reality.

With 600 billion tons of melting ice flowing into oceans that are
absorbing heat twice as fast as 18 years ago, the Marshallese will need
to move fast. The underwater freshwater supply has been salivated by
this influx of seawater.
In 2013 over 200 homes were damaged in the capital Majuro, and the
airport was forced to close due to particularly high tides. Recent
research indicates that sea levels have been increasing by 3.4
millimeters (0.13 inches) per year.
A one-meter rise could result in the loss of 80 percent of the Majuro
Atoll, which is home to half the nation's population. To a certain
extent, the Marshallese are trapped on their islands, such as the
Majuro Atoll, when large storms or tides occur, having no recourse to
evacuate to higher grounds or neighboring islands.

The geographic isolation of the Marshall Islands renders any disaster
caused by climate change especially destructive. The tourism industry
of the Marshall Islands, only recently developed and has even more
potential to grow, is seriously threatened by sea-level rise and violent
storms.

The Marshall Islands have called for international aid to ameliorate
the effects of climate change on the Marshall Islands. The Marshall
Islands have also called for a joint international effort to slow the rate
of climate change, especially in regards to increasing sea levels.

Among the many efforts to protect the culture of the Marshall Islands
is an effort to buy land and relocate the people to other locations.

Currently several of the biggest relocation sites outside of the
Marshall Islands are Hawaii, Washington State, and Springdale,
Arkansas, where over 10,000 Marshall Islanders currently live.

Tuvalu, Kiribati, and Other Islands

Climate change is not only affecting the Maldives and the Marshall
Islands. All developing island nations, especially low lying ones with
coastal population centers, are threatened by the effects of climate
change.

Small island states in the Pacific are responsible for only 0.03 percent
of the world's carbon dioxide emissions, and yet the millions of
people who live here are experiencing some of the earliest and most
severe consequences.

For them, climate change is an undeniable existential threat to their
homeland, their culture, and their livelihoods. But other threats could
come a whole lot sooner.

Initial research suggests that as sea levels rise, some islands might run
out of freshwater long before they run out of the land.

Even now, on most developing islands in the Pacific, freshwater is
already an imperiled resource. This disaster scenario could deprive
entire isolated islands of their sole source of drinking water, forcing
residents to rely on rainfall and shipments alone.
Group of Pacific island nations - including Fiji, Kiribati, Nauru,
Micronesia, the Marshall Islands, the Solomon Islands, Vanuatu,
Timor Leste, and Tonga - came together to declare their situation a
climate crisis and demand major emitters around the world do
something about it. As early as 2030, they say, their lands could
become uninhabitable.
Tuvalu is a small Polynesian island nation located in the Pacific
Ocean. It can be found about halfway between Hawaii and Australia.
It is made up of nine tiny islands, five of which are coral atolls while
the other four consists of land rising from the sea bed.

Global warming is dangerous in Tuvalu because the average height of
the islands is less than 2 meters above sea level, with the highest point
of Niulakita being about 4.6 meters above sea level.
The sea level at the Funafuti tide gauge has risen at 3.9 mm per year,
which is approximate twice the global average. Tuvalu could be one
of the first nations to experience the effects of sea levels raised.

Not only could parts of the island be flooded but the rising saltwater
table could also destroy deep-rooted food crops such as coconut,
pulaka, and taro.

Existing scientific narratives suggest that Tuvalu may become
uninhabitable as a consequence of rising sea levels, however results of
research from the University of Auckland challenge the existing
narratives by showing that island expansion has been the most
common physical alteration throughout Tuvalu over the past four
decades.
The results challenge the existing viewpoint of island loss due to
rising sea levels by showing that the islands are dynamic features that
will persist as sites for habitation over the next century and allows for
alternate opportunities for adaptation rather than a forced withdrawal.

Kiribati is a low-lying Pacific Island nation found west of the
International Date Line. It is an archipelago of 33 islands, 21 of them
inhabited with a total land area of 313 square miles.
The islands are atolls, each one a ring-shaped coral reef that encircles
a lagoon. Because atolls are naturally low-lying and have a high ratio
of coastline to land area, they are especially vulnerable to sea-level
rise and storm surges. With most of its land only a few feet above sea
level, Kiribati has already experienced growing damage from storms
and flooding.

Some of the nation's uninhabited islets (small islands) have even
vanished beneath the Pacific. Rising sea surface temperatures pose an
additional danger to Kiribati.

Coral reefs, which are critical to sustaining atolls and their islands
which are very sensitive even to small increases in ocean temperature,
which can cause coral bleaching.
Global warming threatens to render Kiribati unlivable well before it is
completely submerged.
If our heat-trapping emissions continue at today's rates, rising ocean
waters may shrink Kiribati's land area, increase storm damage, and
threaten its freshwater reserves.
Kiribati people risk losing their homes, country, and heritage.
Adaptations such as decolonizing the saltwater that intrudes into
freshwater aquifers are technologically possible.
However, given that Kiribati and other low-lying island countries,
including the Maldives and Tuvalu, are among the poorest nations in
the world, they are unlikely to be able to afford such measures.

Challenges faced by Small Island Nations

-Human Health

Many small island states currently suffer from climate-sensitive
health problems, including morbidity and mortality from extreme
weather events, certain food, and water-borne diseases.

Extreme weather and climate events such as tropical cyclones, storm
surges, flooding, and drought can have both short and long-term
effects on human health, including drowning, injuries, increased
disease transmission, and health problems associated with
deterioration of water quality and quantity.

Most small island nations are in tropical areas with weather conducive
to the transmission of diseases such as malaria, dengue, and more.
The linkages between human health, climate variability, and seasonal
weather have been demonstrated in several recent studies.
For example, the Caribbean has been identified as a “highly endemic
zone for leptospirosis," with Trinidad and Tobago, Barbados, and
Jamaica representing the highest annual incidence (12, 10, and 7.8
cases per 100,000, respectively) in the world.

- Relocation and Migration

Evidence of human migration as a response to climate change is
scarce for small islands. Furthermore, there is no evidence of any
government policy that allows for climate “refugees” from islands to
be accepted into another country.

In the Pacific, environmental change has been shown to affect land
use and land rights, which in turn have become drivers of migration.

In a survey of 86 case studies of community relocations in the Pacific
Islands, it was found that environmental variability and natural
hazards accounted for 37 communities relocating.

In the Pacific, where land rights are a source of conflict, climate
change could increase levels of stress associated with land rights and
impact on migration.

To understand better the impact of climate change on migration there
is an urgent need for robust methods to identify and measure the
effects of the drivers of migration on migration and resettlement.

-Biodiversity and Water resources

Climate change impacts on terrestrial biodiversity on islands
frequently fall into three general categories, namely: (1) ecosystem
and species horizontal shifts and range decline; (2) altitudinal species
range shifts and decline mainly due to temperature increase on high
islands; and (3) exotic and pest species range increase and invasions
mainly due to temperature increase in high-latitude islands.

Freshwater supply in small island environments has always presented
challenges and has been an issue raised in IPCC reports. On high
volcanic and granitic islands, small and steep river catchments
respond rapidly to rainfall events, and watersheds generally have
restricted storage capacity.

On porous limestone and low atoll islands, surface runoff is minimal
and water rapidly passes through the substrate into the groundwater
lens.

Detection of long-term statistical change in precipitation is an
important prerequisite toward a better understanding of the impacts of
climate change in small island hydrology and water resources.

-Island Economies

There are many economic downsides associated with small size and
insularity. It leads to high overhead costs per capita, particularly in
infrastructural outlays.

This is more relevant to climate change adaptation because it often
requires upgrades and redesign of island infrastructure.

Insularity leads to the high cost of transport per unit, associated with
purchases of raw materials and industrial supplies in small quantities,
and sales of locally produced products to distant markets.

These disadvantages are associated with the inability of small islands
to reap the benefits of economies of scale, resulting in a high cost of
doing business in small islands.

High costs are also associated with the small size of island states
when impacted by extreme events such as hurricanes and droughts.

Many small island nations are dependent on a limited number of
economic sectors such as tourism, fisheries, and crops, all of which
are climate-sensitive, leading to the fact that on the one hand climate
change adaptation is integral to social stability and economic vitality
but that government adaptation efforts are constrained because of the
high cost on the other.

Past Actions and Plausible solutions

UNEP has come up with varying degrees of national-level efforts
within small island developing States. Most island countries have
ratified the United Nations Framework Convention on Climate
Change, and are acting to ensure compliance through a coordinated
series of projects in the past.

Broad strategic directions related to climate change are covered in the
national environmental management strategies of most Pacific small
island developing States.

In some cases, specific policies or strategies for climate change are
being developed; in others, they are being integrated into coastal
management plans.

The United Nations Environment Programme is supporting a study on
country case studies on climate change impacts and assessment and
adaptation in Cuba, with financial support from the Government of
Denmark.

Additional UNEP small island developing States-related activities
include projects to assist small island developing States in preparing
their national communications for the Convention; the countries
involved are Niue and Mauritius, and proposals for similar enabling
activities in Cuba, Haiti, Comoros, and the Dominican Republic are
also in the preparation stage.

However, little work has been undertaken to develop detailed
strategies for adaptation in small island developing States at the
national level.

Therefore, sustainable and effective resolutions need to be made and
implemented. It should also include the ways to ensure that critical
programs that will be initiated in the future are sustained beyond the
lifetime of the project.

Carrying out new regional activities under the UNEP regional seas
program such as the establishment of task teams and involvement of
locals is a solution that can be taken into consideration.

Questions, A Resolution Must Answer/Address

-How can the international community help small island nations cope
with the economic effects of climate change?

- How much responsibility do developed countries have in regards to
bailing out such small island nations under the Paris Agreement?

-What sort of Sustainable measures need to be taken to ensure that
these territories do not disappear?

-What type of projects should the international community fund to
protect small island nations and by how much?

-Is there a need for a new legal framework to deal with the issue of
‘Small Islands and rising sea levels’?

-How can the international community adapt to and cope with the
threats posed by climate change on Small Island Nations and
international security?

-Which subsidiaries of the UN should be responsible for
implementing strategies to adapt to rising sea levels?

-To what extent are we currently able to accurately assess how much
time and money will need to be spent adapting to rising sea levels and
how can we improve current assessment methods or implement new
ones?

-What are some effective solutions for the above-mentioned
challenges faced by Small Island Nations?

-What are some quick solutions that can be implemented to handle
some recent and more urgent problems?

Bibliography

https://www.un.org/en/chronicle/article/small-islands-rising-
seas
https://unfccc.int/news/global-sea-level-rise-is-accelerating-
study
https://www.un.org/Depts/los/general_assembly/contributions
_2017/UNEP.pdf
https://apps.unep.org/repository/free-keywords/sea-level-rise
https://www.bbc.com/future/article/20190813-how-to-save-a-
sinking-island-nation
https://www.bbc.com/future/article/20171027-how-artificial-
islands-could-help-us-adapt-to-climate-change
https://www.aljazeera.com/news/2019/09/time-experts-warn-
rising-sea-levels-190905054818150.html

Virtual RKCMUN-II

BACKGROUND GUIDE
ALL INDIA POLITICAL PARTIES MEET

AGENDA: DISTRIBUTION AND COMPENSATION OF

GST FROM CENTRAL GOVERNMENT TO STATE
GOVERNMENTS

CHAIRPERSON: AARAV PAREKH

VICE CHAIRPERSON: DHRITI JOGI

CONTENTS

1) Letter From the Executive Board
2) What is GST?
3) India’s Adoption of GST
4) Taxes Replaced by GST
5) Types of GST
6) What is GST Distribution From Central

Government to State Government?
7) GST Compensation
8) Current Scenario
9) Bibliography

Letter from the Executive Board

Members of Parliament,

Greetings

The Executive Board of the All India Political Parties Meet
welcomes you to RKC MUN 2020. For most of you it is the
first ever MUN conference in your career, and the
executive board strongly encourages you to go through the
study guide that has been prepared for you as part of the
conference in order to get an in depth understanding of the
issue that will be discussed during the conference. We will
be discussing “Distribution of GST among states” as our
agenda for the AIPPM. This issue has been talked about a
lot in the recent times and is very sensitive yet crucial. It is
up to the leaders of this esteemed committee to step up
and provide solutions for this problem and lead the world
towards better working solutions which the concerned
leaders have still not managed to come up with.

We look forward to an engaging debate filled with
comprehensive solutions that will enrich our perspectives
with a hopeful future. If you have any doubts regarding the
guide or the committee, feel free to contact us at
[email protected] or at [email protected]

Regards,

Chair: Aarav Parekh

Vice Chair: Dhriti Jogi

WHAT IS GST?

GST (Goods and Services Tax) is one indirect tax for the
whole nation. It is the resultant tax after subsuming major
Central and State indirect taxes. GST is a destination
based tax levied on the consumption of goods and
services across the nation, thus rendering the country one
unified common market .In other words, it is a value-added
tax levied on most goods and services sold for domestic
consumption. The GST is paid by consumers, but it is
remitted to the government by the businesses selling the
goods and services. The GST portion is collected by the
business or seller and forwarded to the government.

How the Goods and Services Tax (GST) System Works

Most countries with a GST have a single unified GST
system, which means that a single tax rate is applied
throughout the country. A country with a unified GST
platform merges central taxes (e.g., sales tax, excise duty
tax, and service tax) with state-level taxes (e.g., sales tax,
entertainment tax, octroi, entry tax, transfer tax, sin tax,
and luxury tax) and collects them as one single tax. These
countries tax virtually everything at a single rate.

India's Adoption of the Goods and Services

Tax (GST)

India established the goods and services tax (GST) on 1
July2017, which was the biggest reform in the country's tax
structure in decades. The main objective of incorporating
the GST was to eliminate tax on tax, or double taxation,
which cascades from the manufacturing level to the
consumption level.

The underlying theme was to have a ‘one nation one tax’
which would improve ease of doing business for taxpayers,
bring in transparency, ensure timely compliance and
ultimately reduce the tax burden for the common man.

The GST Council and Central Board of Indirect Taxes and
Customs (CBIC) have played an important role in
handholding taxpayers/businesses for smooth transition to
this new regime and in addressing their grievances.

The following taxes are replaced by GST:

 Central Excise Duty
 Additional Excise Duty
 Service Tax
 Additional Customs Duty (commonly known as

Countervailing Duty)
 Special Additional Duty of Customs
 State Value Added Tax/Sales Tax
 Entertainment Tax
 Central Sales Tax (imposed by the Centre and collected

by the State)
 Entry tax

TYPES OF GST

As per the newly implemented tax system, there are 3
different types of GST:

 Integrated Goods and Services Tax (IGST): It is a
tax levied on all Inter-State supplies of goods and/or
services and will be governed by the IGST Act.

 State Goods and Services Tax (SGST): it is a tax
levied on Intra State supplies of both goods and
services by the State Government and will be
governed by the SGST ACT.

 Central Goods and Services Tax (CGST):
The CGST act has been enacted to make a provision for
levy and collection of tax on intra-state supply of goods or
services or both by the Central Government and the
matters connected therewith or Incidental thereto

WHAT IS GST DISTRIBUTION FROM
CENTRAL GOVERNMENT TO STATE
GOVERNMENTS?

Under GST, CGST is a tax levied on Intra State supplies of
both goods and services by the Central Government and
will be governed by the CGST Act. SGST will also be levied
on the same Intra State supply but will be governed by
the State Government.

Now the problem arises that the centre in a letter to the
states has promised it would clear their goods and services
tax (GST) dues despite the massive shortfall in GST cess
collection amid the coronavirus pandemic, a situation that
has been described as "an act of God" by Finance
Minister Nirmala Sitharaman.

GST COMPENSATION

THE ISSUE OF THE GST
COMPENSATION TO STATES

The GST Council is meeting on Thursday to discuss the issue
of GST compensation to states. The central government is
required to compensate states for any loss of revenue they
incur due to GST. The Centre must pay this compensation on
a bi-monthly basis, but over the past year these payments
have been delayed by several months due to lack of funds.
The COVID-19 pandemic and the consequent lockdown have
amplified the issue manifold, with both centre and states facing
a revenue shortfall, limiting the ability of the Centre to meet
states’ compensation needs.

Why is the Centre required to compensate states for
GST?

With GST implementation in 2017, the principle of indirect
taxation for many goods and services changed from origin-
based to destination-based. This means that the ability to tax
goods and services and raise revenue shifted from origin
states (where the good or service is produced) to destination
states (where it is consumed). This change posed a risk of
revenue uncertainty for some states. This concern of states
was addressed through constitutional amendments, requiring
Parliament to make a law to provide for compensation to states
for five years to avoid any revenue loss due to GST.

For this purpose, the GST (Compensation to States) Act was
enacted in 2017 on the recommendation of the GST Council.

The Act guarantees all states an annual growth rate of 14
percent in their GST revenue during the period July 2017-June
2022. If a state’s GST revenue grows slower than 14 percent,
such ‘loss of revenue’ will be taken care of by the Centre by
providing GST compensation grants to the state. To provide
these grants, the Centre levies a GST compensation cess on
certain luxury and sin goods such as cigarettes and tobacco
products, pan masala, caffeinated beverages, coal, and certain
passenger vehicles. The Act requires the Centre to credit this
cess revenue into a separate Compensation Fund and all
compensation grants to states are required to be paid out of
the money available in this Fund.

How much compensation is provided to states?

For 2018-19, Centre gave Rs 81,141 crore to states as GST
compensation. However, for the year 2019-20, the
compensation requirement of states nearly doubled to Rs 1.65
lakh crore. A huge increase in requirement implies that states’
GST revenue grew at a slower rate during 2019-20. This can
be attributed to the economic slowdown seen last year, which
resulted in a nominal GDP growth of 7.2 percent. This was
significantly lower than the 12 percent GDP growth forecast in
the 2019-20 union budget (Figure 1).

In 2019-20, the gross GST revenue (Centre+states) increased by just
4 percent over the previous year. Despite this, due to the
compensation guarantee, all states could achieve the growth rate of
14 percent in their GST revenue—much higher than the overall
growth in GST revenue. However, there was a delay in payment of
compensation from the Centre. More than Rs 64,000 crore of the
compensation requirement of states for 2019-20 was met in the
financial year 2020-21.

What led to a delay in payment of compensation to states?

In 2019-20, the delay in payment was observed due to insufficient
funds with the Centre for providing compensation to states. These
funds are raised by levying a compensation cess on the sale of certain
goods, some of which were affected by the economic slowdown. For
instance, in 2019-20, sales of passenger vehicles declined by almost
18 percent and coal offtake from domestic coal companies reduced
by nearly 5 percent, over the previous year. As a result, cess
collections registered a growth of just 0.4 percent in 2019-20 (Figure
2), against the 104 percent increase seen in the compensation
requirement of states. This resulted in a shortfall of funds of nearly
Rs 70,000 crore.

CURRENT SCENARIO:

The Constitution (One Hundred and First Amendment) Act,
2016, was the law which created the mechanism for
levying a nationwide GST. Written into this law was a
provision to compensate the States for loss of revenue
arising out of implementation of the GST. The adoption of
the GST was made possible by the States ceding almost
all their powers to impose local-level indirect taxes and
agreeing to let the prevailing multiplicity of imposts be
subsumed under the GST.
Asserting that it is under no obligation to make good any
shortfall in the GST and that it is up to the GST Council to
devise a solution, the Union government has proposed that
the States borrow directly from the market by issuing debt
under a special window coordinated by the Ministry of
Finance. The Centre has also contended(to have to deal
with a problem) that of the projected shortfall of about
₹2.35 lakh crore, only ₹97,000 crore is the deficit(the
amount by which something ,especially ,sum of money is
too small) arising out of GST implementation, with the
balance ₹1.38 lakh crore attributable to an ‘act of God’ (the
COVID-19 pandemic) that is independent of
implementation of the new indirect tax regime.
Accordingly, Option 1 entails the States selling debt
securities in the market to raise the ₹97,000 crore. The
Centre will “endeavour” to keep the interest cost on these

borrowings “at or close to” the yield on G-Sec (bonds
issued by the Government of India), and in the event of the
cost being higher, bear a part of the difference through a
subsidy. This additional borrowing by the States will not be
accounted for as a part of the State’s debt for purposes of
its overall debt calculation, and the repayment of the
principal and interest on these borrowings will be done
from the Compensation Fund by extending the period of
cess collections beyond 2022. Under Option 2, the States
can sell debt in the market to raise the entire ₹2.35 lakh
crore shortfall but with the terms of the borrowing being far
less favourable. Crucially, here the interest cost would
have to be borne by them with only the principal being
serviced by the Compensation Fund.

Why is there an impasse on this issue?

Several States, including West Bengal, Kerala, Punjab and
Tamil Nadu, have rejected the options and made clear that
the onus is on the Centre to borrow from the market to
make good any shortfall in the Compensation Fund. Tamil
Nadu, in a letter to the Prime Minister, stressed that the
States had agreed to the implementation of the GST only
on the basis of the “unequivocal commitment given by the
Government of India to compensate the States for any
revenue loss”. Observing that States had not only suffered
severe losses in revenue in the wake of the pandemic but
had also been at the forefront of the battle to prevent the
spread of the disease, Tamil Nadu said any delay in
ensuring the compensation payments would compromise

essential capital spending by the States to restart the
economy effectively. These states dismiss the Centre’s
contention that any additional borrowing by it would have
deleterious macro-economic consequences and point out
that global credit rating agencies essentially monitor the
overall general government deficit and borrowing levels.

GST compensation issue. Sources within the Finance
Ministry have told India Today that at least 21 states/UTs
have, so far, preferred to opt for borrowing option 1
proposed by the GST Council to meet their compensation
shortfall.

The 21 states include: Andhra Pradesh, Arunachal
Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal
Pradesh, Jammu & Kashmir, Karnataka, Madhya Pradesh,
Manipur, Meghalaya, Mizoram, Nagaland, Odisha,
Puducherry, Sikkim, Tripura, Uttarakhand and Uttar
Pradesh.

BIBLIOGRAPHY

https://timesofindia.indiatimes.com/business/india-
business/centre-unlikely-to-cede-ground-on-gst-
compensation/articleshow/77842064.cms

https://www.thehindu.com/business/Economy/what-is-the-
gst-compensation

https://www.thehindu.com/business/indias-unemployment-
rate-rises-to-27

https://www.thehindu.com/business/indias-unemployment-
rate-rises-to-27

https://timesofindia.indiatimes.com/videos/news/gst-
council-meet-why

https://timesofindia.indiatimes.com/business/india-
business/auto

www.thehindu.com