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 Constitution (One Hundred and First Amendment) Act, 2016, was the law which created the mechanism for levying a nationwide GST. The adoption of the GST was made possible by the States ceding almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed under the GST. Written into this law was a provision to compensate the States for loss of revenue arising out of implementation of the GST.

Rational behind GST (Compensation to states) Act 2017:

1. Fixed revenue growth: The centre assured a 14% year to year growth on GST revenues for a period of five years. If such an amount was not available, the centre assured states to compensate states for such deficiency.

2. Raising new revenue sources: State governments lost their power to raise revenue from alternative indirect sources after GST. This deficiency was fulfilled by the union government by compensating them with a fixed amount regardless of the situation.

3. Create constitutional liability: The Act created a constitutionally binding agreement between centre and state regarding GST compensation.

Impact of covid-19 on GST compensation and creation of federal tension:

1. Decrease in GST revenues have impacted the government’s ability to compensate the state as they simply don’t have the money to fulfil their obligation. The shortfall is about 2.35 lakh crore.

2. The state needed the money to fight the pandemic but the centre was reluctant to perform its obligation. 

3. Five States and Union Territories of Kerala, Punjab, West Bengal, Puducherry and Delhi have voiced their concerns over the proposals. The Centre proposal was States can either borrow ₹97,000 crore, without having it added to their debt and with the principal and interest paid out from future cess collections, or they can borrow the entire ₹2.35-lakh crore shortfall, but will have to provide for interest payments themselves.

4. They (above mentioned states) are stating that the Finances of the states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlays due to the pandemic and lockdowns.

5. The state cited the constitutional safeguard and demanded their legal share.

6. These States dismiss the Centre’s contention that any additional borrowing by it would have deleterious macro-economic consequences and point out that global credit rating agencies essentially monitor the overall general government (state and centre combined) deficit and borrowing levels.

The country’s grand federal bargain in the form of GST should not be weakened to an extent that the very idea of a national tax comes under threat. GST reforms must not fall victim to the trust deficit engendered by this standoff between the Centre and the States. They must cooperate and coordinate in this hour of pandemic to 

bolster common interest.