Our Constitution provides protection against laws imposing criminal liability for actions committed prior to the enactment of the law. Article 20 (1) under the Part III (Fundamental Rights), reads: 20. (1) No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. Thus, the maximum penalty that can be imposed on an offender cannot exceed those specified by the laws at the time. In the context of the Bhopal Gas tragedy in 1984, the Indian Penal Code (IPC) was the only relevant law specifying criminal liability for such incidents. The CBI, acting on behalf of the victims, filed charges against the accused under section 304 of the IPC (See Note 1). Section 304 deals with punishment for culpable homicide and requires intention of causing death. By a judgment dated September 13, 1996, the Supreme Court held that there was no material to show that “any of the accused had a knowledge that by operating the plant on that fateful night whereat such dangerous and highly volatile substance like MIC was stored they had the knowledge that by this very act itself they were likely to cause death of any human being.” The Supreme Court thus directed that the charges be re-framed under section 304A of the IPC (See Note 2). Section 304A deals with causing death by negligence and prescribes a maximum punishment of two years along with a fine. Consequently, the criminal liability of the accused lay outlined by section 304A of the IPC and they were tried accordingly. Civil liability, on the other hand, was adjudged by the Courts and allocated to the victims by way of monetary compensation. Soon after the Bhopal Gas tragedy, the Government proposed and passed a series of laws regulating the environment, prescribing safeguards and specifying penalties. These laws, among other things, filled the legislative lacunae that existed at the time of the incident. Given the current provisions (See Note 3), a Bhopal like incident will be tried in the National Green Tribunal (once operationalized) and most likely, under the provisions of the the Environment (Protection) Act, 1986. The criminal liability provisions of the Act (See Note 4) prescribe a maximum penalty of five years along with a fine of one lakh rupees. Further, if an offence is committed by a company, every person directly in charge and responsible will be deemed guilty, unless he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such an offence.

The civil liability will continue to be adjudged by the Courts and in proportion to the extent of damage unless specified separately by an Act of Parliament.

Notes 1) IPC, Section 304. Punishment for culpable homicide not amounting to murder Whoever commits culpable homicide not amounting to murder shall be punished with imprisonment for life, or imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine, if the act by which the death is caused is done with the intention of causing death, or of causing such bodily injury as is likely to cause death, Or with imprisonment of either description for a term which may extend to ten years, or with fine, or with both, if the act is done with the knowledge that it is likely to cause death, but without any intention to cause death, or to cause such bodily injury as is likely to cause death. 2) IPC, Section 304A. Causing death by negligence Whoever causes the death of any person by doing any rash or negligent act not amounting to culpable homicide, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine, or with both. 3) Major laws passed since 1984: 1986 - The Environment (Protection) Act authorized the central government to take measures to protect and improve environmental quality, set standards and inspect industrial units. It also laid down penalties for contravention of its provisions. 1991 - The Public Liability Insurance Act provided for public liability - insurance for the purpose of providing immediate relief to the persons affected by an accident while handling hazardous substances. 1997 - The National Environment Appellate Authority Act established to an appellate authority to hear appeals with respect to restriction of areas in which any industries, operations or processes are disallowed, subject to safeguards under the Environment (Protection) Act, 1986. 2009 - The National Green Tribunal Act, yet to be notified, provides for the establishment of a tribunal for expeditious disposal of cases relating to environmental protection and for giving relief and compensation for damages to persons and property. This Act also repeals the National Environment Appellate Authority Act, 1997. 4) Criminal liability provisions of the Environment Protection Act, 1986 Section 15. Penalty for contravention of the provisions of the Act (1) Whoever fails to comply with or contravenes any of the provisions of this Act, or the rules made or orders or directions issued thereunder, shall, in respect of each such failure or contravention, be punishable with imprisonment for a term which may extend to five years with fine which may extend to one lakh rupees, or with both, and in case the failure or contravention continues, with additional fine which may extend to five thousand rupees for every day during which such failure or contravention continues after the conviction for the first such failure or contravention. (2) If the failure or contravention referred to in sub-section (1) continues beyond a period of one year after the date of conviction, the offender shall be punishable with imprisonment for a term which may extend to seven years. Section 16. Offences by Companies (1) Where any offence under this Act has been committed by a company, every person who, at the time the offence was committed, was directly in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

Later this week, the GST Council will meet 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 one 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% in their GST revenue during the period July 2017-June 2022.   If a state’s GST revenue grows slower than 14%, 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%.   This was significantly lower than the 12% GDP growth forecast in the 2019-20 union budget (Figure 1).

Figure 1:  GDP growth rate (2017-21)

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Sources:  Union Budget Documents; MOSPI; PRS.

In 2019-20, the gross GST revenue (Centre+states) increased by just 4% over the previous year.  Despite this, due to the compensation guarantee, all states could achieve the growth rate of 14% in their GST revenue – much higher than the overall growth in GST revenue.  However, there was a delay in payment of compensation from 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 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% and coal offtake from domestic coal companies reduced by nearly 5%, over the previous year.  As a result, cess collections registered a growth of just 0.4% in 2019-20 (Figure 2), against the 104% increase seen in the compensation requirement of states.  This resulted in a shortfall of funds of nearly Rs 70,000 crore.

Figure 2:  Cess collections insufficient for providing compensation

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Note:  In 2017-18, GST was implemented for only nine months.  Compensation amount shown may not match with the amount released in that financial year because of delay in releases.

Sources:  Union Budget Documents; Ministry of Finance; GST Council; Lok Sabha Questions; PRS.

How can compensation be paid to states if cess collections are insufficient?

The shortfall in collections for 2019-20 was met through: (i) surplus cess collections from previous years, (ii) partial cess collections of 2020-21, and (iii) a transfer of Rs 33,412 crore of unsettled GST funds from the Centre to the Compensation Fund.   These unsettled funds are GST collections, generated in 2017-18 from inter-state and foreign trade, that have not yet been settled between centre and states.

In the 2020-21 budget, the Centre has estimated a 10% growth in nominal GDP.  However, due to the impact of COVID-19 and the lockdown, the actual growth in 2020-21 is likely to be much lower.  In such a scenario, states’ GST revenue would also be much lower than expected, thus leading to a higher compensation requirement.  However, the ability of Centre to pay compensation depends on the cess collections, which are also getting impacted this year.  For instance, cess collections during the period Apr-Jun 2020 have been 41% lower in comparison to the same period last year.  Moreover, of the Rs 14,482 crore collections made during this period, Rs 8,680 crore has been likely used up for paying compensation for 2019-20.

Note that under the GST (Compensation to States) Act, 2017, Centre can provide compensation to states only through the money available in the Compensation Fund.   The Union Finance Minister, in her budget speech in February 2020, clarified that transfers to the Fund would be limited only to collections of the GST compensation cess.  Despite a shortfall of money in the Compensation Fund, the Centre is constitutionally obligated to meet states’ compensation requirement for a period of five years.

Various measures have been suggested to address the issue of shortfall in the Fund, either by reducing the compensation payable to states (which would require Parliament to amend the Act following GST Council’s recommendation) or by supplementing the funds available with Centre for providing compensation to states.   The Act allows the GST Council to recommend other funding mechanisms/ amounts for credit into the Compensation Fund.  For example, one of the measures proposed for meeting the shortfall involves Centre using market borrowings to pay compensation to states, with the idea that these borrowings will be repaid with the help of future cess collections.  To enable this, the GST Council may recommend to Centre that the compensation cess be levied for a period beyond five years, i.e. post June 2022.

Impact on states post 2022

In 2019-20, except for a few north-eastern states, most states saw their compensation requirements increase multifold by 2-3 times, over the previous year’s figures.  Table 1 shows the compensation requirement of states for the years 2018-19 and 2019-20.  Six states (Delhi, Gujarat, Karnataka, Maharashtra, Punjab, and Tamil Nadu) accounted for 52% of the total requirement of compensation for 2019-20.  Further, in some states such as Punjab and Delhi, compensation grants form a significant share of the overall revenue receipts (20% and 16% resepctively).  

Note that states have been guaranteed compensation only for a period of five years.  After June 2022, states dependent on compensation will observe a revenue gap due to a cut in these grants coming from Centre.  States have roughly two years to bridge this gap with other tax and non-tax sources to avoid a potential loss of revenue, and a consequent fall in the size of their state budget, which could adversely affect the economy.  To what extent will such concerns be alleviated remains to be seen based on the course of action decided by the GST Council.

Table 1:  GST compensation requirement of states for 2018-19 and 2019-20 (in Rs crore)

State

2018-19

2019-20

% increase in compensation requirement

Amount

As a % of revenue

Amount

As a % of revenue*

Andhra Pradesh

0

-

3,028

3%

-

Assam

455

1%

1,284

1%

182%

Bihar

2,798

2%

5,464

4%

95%

Chhattisgarh

2,592

4%

4,521

7%

74%

Delhi

5,185

12%

8,424

16%

62%

Goa

502

5%

1,093

9%

118%

Gujarat

7,227

5%

14,801

10%

105%

Haryana

3,916

6%

6,617

10%

69%

Himachal Pradesh

1,935

6%

2,477

8%

28%

Jammu and Kashmir

1,667

3%

3,281

5%

97%

Jharkhand

1,098

2%

2,219

4%

102%

Karnataka

12,465

8%

18,628

11%

49%

Kerala

3,532

4%

8,111

9%

130%

Madhya Pradesh

3,302

3%

6,538

4%

98%

Maharashtra

9,363

3%

19,233

7%

105%

Meghalaya

66

1%

157

2%

138%

Odisha

3,785

4%

5,122

5%

35%

Punjab

8,239

13%

12,187

20%

48%

Rajasthan

2,280

2%

6,710

5%

194%

Tamil Nadu

4,824

3%

12,305

7%

155%

Telangana

0

-

3,054

3%

-

Tripura

172

1%

293

3%

70%

Uttar Pradesh

0

-

9,123

3%

-

Uttarakhand

2,442

8%

3,375

11%

38%

West Bengal

2,615

2%

6,200

4%

137%

Note:   Arunachal Pradesh, Manipur, Mizoram, Nagaland, and Sikkim did not require any compensation in 2018-19 and 2019-20.

*Revenue for the year 2019-20 does not takes into account those GST compensation grants which were payable to states in 2019-20 but were released by Centre in the year 2020-21. The percentage figures would be slightly lower if such grants are included in 2019-20 revenue.

Sources:  State Budget Documents; Ministry of Finance; Lok Sabha Questions; CAG; PRS.