GS3 PYQ (Mains Answer Writing): Goods and Services Tax Act 2017 | Indian Economy for UPSC CSE PDF Download

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 MAINS GS3 )

The rationale behind the GST Act of 2017

• The concept of Goods and Services Tax came in 2005 when the Vijay Kelkar-led task force submitted its report and recommended the replacement of all indirect taxes with GST. 
• The dream became a reality when the new tax was introduced at the midnight of June 30 and July 1, 2017. 
• It was introduced as the biggest tax reform for indirect taxes. GST is a comprehensive, multistage, destination-based tax that is levied on every value addition. 
• It is a single domestic indirect tax law for the entire country. 
• In the earlier indirect tax regime, there were many indirect taxes levied by both the state and the centre. 
• With the previous tax system, there were multiple taxes added at each stage of the supply chain, without taking credit for taxes paid at previous stages. 
• As a result, the end cost of the product did not clearly show the actual cost of the product and how much tax was applied. That cascading structure was too complex and inefficient. COVID-19 impacted the GST compensation fund and created new federal tensions As the Covid-19 pandemic hit the globe, India’s botched response resulted in becoming one of the worst impacted countries economically. 
• This was a federal crisis like no other. The corona virus pandemic severely affected economy. The Goods and Services Tax (GST) revenue collection was impacted by nationwide lockdown. The shortfall in the tax collection was estimated at 2.35 lakh crore, for fiscal 2021. 
• This in turn impacted GST compensation to states. The relation between the Centre and the states has reached its nadir with the controversy over the GST compensation payment. 
• However, the Union government showed an unwillingness to borrow the necessary amount and make it available to the cess fund . 
• It was feared that such a large borrowing will push up the interest rate. Then the solution will be to monetize the debt. That’s what governments all over the world were doing. 
• Also, it was much more convenient for the Centre to borrow to meet the shortfall in the cess fund. The cost of borrowing by states would be higher by 1-2 percentage points. The states’ fiscal deficit ceiling would have to be raised.

Conclusion 
Analyzing the situation, it seems that it is Far from the “co-operative federalism” that was promised, it appears that this coercive fiscal pressure may undermine the basis of any federalism at all, and in the future, it will impact the center- state cooperation.

Topics covered- Goods and Services Act