Cost of GST compensation
Distilled Policy Brief
- The GST (Compensation to States) Act 2017 guarantees states an annual revenue growth rate of 14% for five years (July 2017 to June 2022), with the Centre mandated to cover any shortfall using proceeds from a compensation cess levied on luxury and sin goods.
- Implementation of GST shifted indirect taxation from an origin-based to a destination-based principle, creating potential revenue uncertainties that led to constitutional compensation guarantees.
- In 2019-20, state compensation requirements nearly doubled to Rs 1.65 lakh crore due to an economic slowdown, while compensation cess collections grew by only 0.4%, creating a fund shortfall of nearly Rs 70,000 crore.
🎯 Prelims High-Yield Examination Points
The GST (Compensation to States) Act, 2017 guarantees a 14% annual revenue growth rate to states for five years (July 2017–June 2022), funded through a compensation cess levied on luxury and sin goods.
⚖️ Mains Analytical & Syllabus Linkages
Examine the structural challenges in the GST compensation mechanism, the impact of economic slowdowns and pandemics on cess collections, and federal fiscal relations in India.
🎯 UPSC Prelims Practice Drill
Consider the following statements regarding the Goods and Services Tax (GST) compensation to states in India: 1. The GST (Compensation to States) Act, 2017 guarantees states an annual revenue growth rate of 14% for a period of five years from the implementation of GST. 2. The shift of indirect taxation from an origin-based principle to a destination-based principle created potential revenue uncertainties for producing states, leading to statutory compensation guarantees. 3. The compensation grants are paid by the Centre out of the Consolidated Fund of India. Which of the statements given above is/are correct?
- [A] 1 only
- [B] 1 and 2 only
- [C] 2 and 3 only
- [D] 1, 2 and 3
▶ Reveal Official Answer & Analytical Explanation
Statements 1 and 2 are correct. The GST (Compensation to States) Act, 2017 guarantees states an annual revenue growth of 14% for five years (July 2017 to June 2022) to address revenue uncertainties arising from the shift to a destination-based tax system. Statement 3 is incorrect because compensation grants are paid out of a separate Compensation Fund into which proceeds from the GST compensation cess on luxury and sin goods are credited, not directly from the Consolidated Fund of India.
🏛️ Historical Twin PYQ Anchor (2021)
Consider the following statements regarding the "National Clean Air Programme (NCAP)": 1. It is implemented by the Ministry of Environment, Forest and Climate Change. 2. Central Pollution Control Board acts as the sole regulatory executive body.