The future of GST hangs in the balance

The Centre is best positioned to raise additional resources to bridge the GST compensation gap.

Under GST law, states are guaranteed full compensation for any revenue loss for the first five years after the introduction of the goods and services tax (GST) in July 2017.
The computation of the shortfall — the mechanism for which is spelt out in Section 7 of the GST (Compensation to States) Act, 2017 — is done annually by projecting a revenue assumption based on 14% compounded growth from the base year’s (2015-2016) revenue and calculating the difference between that figure and the actual GST collections in that year.
For the 2020-21 fiscal year, the revenue shortfall has been anticipated at ₹3 lakh crore, with the Compensation Fund expected to have only about ₹65,000 crore.
GST was born in the cradle of this promise and hailed as a forerunner of ‘cooperative federalism’.

There is not enough money in the GST kitty for the Centre to honour this obligation.

The Centre has proposed that the States should borrow money to bridge this gap and that it will act as a guarantor to facilitate this borrowing.

State’s decision to borrow or not should be based on its fiscal situation.
State governments don’t have the powers to levy direct taxes or indirect taxes to earn additional revenues.
Economic logic suggests that the Centre is better positioned than the states to raise additional resources to bridge the GST compensation gap.

Additional revenue can be created through increased taxation of capital market transactions. Between April and June, when economic activity in the nation had come to a complete standstill, India’s stock markets experienced its highest activity levels in its history, with a 75% increase in transactions vis-a-vis last year.
Thus, the Centre can levy a higher tax on such speculative stock market trading to earn additional revenues during these difficult times.
A combination of additional revenues and borrowing by the Centre can help resolve the GST compensation issue.

GST Compensation is primarily an economic issue and should be settled based on what makes the most economic sense for each State and for the nation overall.

Today Current Affairs Upsc Exam Syllabus & Previous Yearpaper.