THE GIST of Editorial for UPSC Exams : 03 September 2020 Grim Sovereign Tangle: On GST compensation standoff(The Hindu)

Grim Sovereign Tangle: On GST compensation standoff(The Hindu)

Mains Paper 3: Economy 
Prelims level: GST compensation
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment


  • Three years after India’s new indirect tax regime was introduced with a slogan of ‘One Nation, One Tax’, it faces an existential crisis.

Patchy structure:

  • Despite its patchystructure with too many rates, complex compliance requirements and multiple mid-course changes, the implementation of the GST, had begun to almost serve as an exemplarof co-operative federalism.
  • All of those gains have quickly unravelledas the slowdown in the economy, exacerbatedby the COVID-19 lockdowns, has thrown all revenue calculations to the wind.
  • The Centre is obliged to pay to the States, for a period of five years, compensation for revenue shortfalls in return for their having cededthe power to levy the multiple taxes that were subsumed into the GST.
  • Last week, Finance Minister asserted, at what may have been the most tenuous GST Council meeting so far, that the Centre will not be able to meet the compensation shortfall.
  • With GST collections sharply undershooting all targets this year, the Centre estimates compensation payable for the full year at ₹3-lakh crore.
  • But just ₹65,000 crore is expected in the cesskitty used to pay out the compensation.

Rejected options:

  • In July, the Centre paid out the last instalment of compensation for the last fiscal and is, so far, yet to pay anything for this year.
  • States have now been given two options, both requiring them to borrow from the market.
  • The Centre contends that only ₹97,000 crore of the revenue shortfall is from implementation of the GST, while ₹1.38-lakh crore is due to extraordinary circumstances posed by an ‘Act of God’ (the pandemic).
  • 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.
  • The Finance Ministry has argued that higher borrowing by the Centre will push up interest rates and dent India’s fiscal parameters.
  • At best, this is specious — total government debt, including States’, is what rating agencies look at.
  • Several States have rejected both options and some, including Tamil Nadu, have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.
  • It is up to the Centre to resolve this impassein a way that future GST reforms do not fall victim to the trust deficit.
  • For now, the only certainty is that the compensation cess levied on demerit goods will stay on beyond 2022, and may even be raised, affecting several businesses, including the jobs-intensive auto sector.


Prelims Questions:

Q.1) With reference to the Labour Bureau, consider the following statements:

1. It is an attached office under Ministry of Labour and Employment, which was set up on 1st October 1946.
2. Labour Bureau has two main wings stationed in Kochi and Chennai.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

Mains Questions:

Q.1) Why the onus of GST compensation to the states should be with the centre? Analyse.