UPSC Mains 2020 · GS III · Q12 · 15 marks · 250 words

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?

हिन्दी में

वस्तु एवं सेवा कर (राज्यों को क्षतिपूर्ति) अधिनियम, 2017 के तर्काधार की व्याख्या कीजिए। कोविड-19 ने कैसे वस्तु एवं सेवा कर क्षतिपूर्ति निधि (जी० एस० टी० कॉम्पेन्सेशन फन्ड) को प्रभावित और नये संघीय तनावों को उत्पन्न किया है?

TaxationFiscal Policy and Budgeting

How a topper answered the closest question

Toppers wrote this one in a test series: “Goods and Service Tax (GST) is a progressive step towards formalisation of Indian economy, however, it has simultaneously dented the dynamics of fiscal federalism. Comment.”

Ghazalpreet KaurAIR 529 · CSE 2022 · 187 wordsTheir whole copy

Opening · a constitutional or legal provision

GST is a One Nation One Tax move by the government done by 101st Constitutional Amendment Act. It subsumes lot of state's and Centre's indirect taxes.

Body · points

Progressive step towards formalisation

  1. Tax base increased = from 56 lakh tax payers in 2017 to 1.85 crore today revealed many new people added in tax base.
  2. Tax revenue increased = average monthly revenue from GST is stabilised to more than 1 lakh crore.
  3. Ease of tax payment by consumers
  4. Transparency = GST number given to each owner and paid online and transparency maintained.
  5. Logistics efficiency enhanced by e-way bill and speed up the movement.

However fiscal federalism is impacted.

Fiscal federalism

  • States' sovereign rights to tax taken by Centre via constitutional amendment
  • Many taxes like VAT was important revenue source for states. It was subsumed by Centre
  • Compensation to states is just for 5 years -> Revenue neutrality unensured.

Close · a summary

Even though fiscal federalism impacted but GST adoption by all states is an example of pooled sovereignty. Further GST Council decisions are taken by 3/4th majority and states continue to play dominant role.

How toppers approach this question, and more on its topic: open the question.

Toppers’ answers to other close questions

Source: UPSC, Civil Services (Main) Examination 2020, General Studies Paper III, Q12. The paper on upsc.gov.in. Themes and links to toppers’ answers are by UPSC Grade, not by UPSC.