Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?
The Goods and Services Tax (Compensation to States) Act of 2017 was the bedrock of the grand bargain that brought states on board for the GST regime. The rationale was to provide a safety net. States were surrendering their fiscal autonomy by subsuming various local taxes into the GST. They feared a potential loss of revenue in the initial years of this new, untested system. The Act, therefore, guaranteed states a 14% year-on-year revenue growth over the base year of 2015-16 for the first five years of GST implementation. Any shortfall in this projected revenue was to be covered by the Centre from a dedicated Compensation Fund, which was financed by levying a cess on sin and luxury goods. This assurance was crucial to building the political consensus needed for India's biggest tax reform.
The COVID-19 pandemic dealt a severe blow to this arrangement. The nationwide lockdown and subsequent economic slowdown caused GST collections to plummet. Consequently, the collection of compensation cess also nosedived, creating a massive shortfall in the fund. The Centre found itself unable to pay the full compensation amount owed to the states. This situation created new federal tensions. The Centre's suggestion that states borrow to cover the deficit was met with strong opposition, with many states arguing that the constitutional obligation to compensate them lay squarely with the Union government. This friction strained Centre-state fiscal relations, raising questions about cooperative federalism and fiscal trust.
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Sakshi Negi
Sakshi Negi is a Delhi-based journalist and content specialist with expertise in educational content and digital media, focusing particularly on government exam preparation and career guidance. With a degree in Journalism and Mass Communication from NRAI School of Mass Communication and her background as a Kendriya Vidyalaya alumna, she brings unique insights into the Indian education system and government sector opportunities.
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Important Questions from GS3
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