Q9.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 (GST), implemented in 2017, unified India's indirect tax regime. The GST (Compensation to States) Act, 2017, was enacted to address states' concerns about potential revenue loss, guaranteeing revenue protection.

Rationale behind the Goods and Services Tax (Compensation to States) Act of 2017

The Act's rationale was to compensate states for surrendering significant indirect tax autonomy, like sales tax and VAT, crucial for a unified national market. It guaranteed states a 14% annual revenue growth for five years from a 2015-16 base. This compensation was funded by a dedicated GST Compensation Cess levied on specific luxury and sin goods, ensuring predictable revenue during transition.

Impact of COVID-19 on the GST Compensation Fund

The COVID-19 pandemic severely impacted the compensation mechanism. The unprecedented economic slowdown led to a sharp decline in both regular GST collections and the Compensation Cess. This drastic reduction rendered the dedicated fund insufficient to meet states' guaranteed revenue requirements, creating a significant fiscal gap.

COVID-19's role in creating new federal tensions regarding GST compensation

The fund's inadequacy created new federal tensions. The Centre's inability to pay full compensation as mandated sparked debate over borrowing responsibility. States emphasized the Centre's legal obligation, while the Centre cited an 'Act of God' and proposed states borrow from the market, facilitated by the Centre. This divergence strained Centre-state financial relations, eroding trust and questioning statutory guarantees under cooperative federalism.

Transparent and collaborative resolution of these compensation shortfalls is crucial to uphold cooperative federalism and ensure fiscal stability for both Union and states.