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?.(UPSC IAS Mains 2020 General Studies Paper – 3)
The Goods and Services Tax is a comprehensive, multi-stage, destination-based tax. It is a single domestic indirect tax law which has subsumed many indirect taxes in India such as services tax, VAT, etc. The Goods and Service Tax (Compensation to States) Act, 2017 provides for a mechanism to compensate the States on account of loss of revenue which may arise due to implementation of the Goods and Services Tax.
Rationale behind this Act
- Raising new revenue sources: After the introduction of GST, States have very limited taxation rights as most of the taxes, barring those on petroleum, alcohol, and stamp duty, were subsumed under GST. This deficiency is fulfilled by the Union by compensating them.
- Fixed revenue growth: The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16. If such a fixed amount is not assured, the Central Government will compensate States for such deficiency.
- Guaranteed compensation: Under the GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years between 2017 and 2022.
Impact of COVID-19 on GST compensation fund and creation of new federal tensions
- The gains of GST have started to quickly erode as the slowdown in the economy, exacerbated by the COVID-19 lockdowns, has thrown all revenue calculations to the wind.
- Due to huge shortfalls in the tax collection under GST the Central government and State Government has come at loggerheads as Centre has shown its incapability to compensate the States as promised under the GST Act 2017.
- The inability of the Government and binding clause in the Act, caused a conflict between federal ideas under the Constitution.
- Many states have concern over the compensation in this hour of need and questioned the Centre to break its federal agreement.
It is time for states to accept the realities and agree to a lower level of compensation, ideally linked to the growth rate of the Indian economy in nominal terms and the Centre must understand that it is their statutory obligation, and they can’t abrogate it. GST reforms must not fall victim to the trust deficit engendered by this standoff between the Centre and the States. Both must cooperate and coordinate in this hour of need.
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