UPSC CSE Mains Syllabus: GS-3-  Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

GST Compensation – Anguishes States – Way Forward

States are agitated about the undue delay by the Centre in paying them the GST compensation, especially as they are starved of funding for fighting the Covid-19 pandemic. As per the GST Compensation Act, the Centre is mandated to compensate the states for loss of revenue on account of implementation of the GST for a period of five years. The compensation payments are to be funded by the Centre levying a cess on the GST on specified goods.

Working smoothly:

In the first two years after the introduction of GST in 2017, the scheme worked smoothly as collections under the cess far exceeded the compensation demand. In fact, the Compensation Fund built up a surplus of about Rs 47,000 crore in these two years.

Rise of issues:

What is needed: 

The states themselves are deprived of adequate finances to boost their economy. Hence, it is time to look for alternatives. 

The Centre could raise special loans against future GST cess accruals in order to help meet its compensation promise to States.  

Given that states account for more than half of the total general government expenditure, the Centre on-lending its market borrowings to them is the best way to revive the economy. 

SOURCE:”Financial Express”


With the GST compensation issue affecting the finances of the states analyse whether the Centre can default on GST compensation to states? Also provide a way forward.