THE GIST of Editorial for UPSC Exams : 29 August 2020 In ‘act of god’, coercive not cooperative federalism(The Hindu)

In ‘act of god’, coercive not cooperative federalism(The Hindu)

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


  • It is beyond anyone’s imagination that the Government of India would invoke the “Force Majeure” clause against its own people.
  • Unfortunately, this has become reality at a time when every Indian State is massively burdened by the COVID-19 crisis and governance has been severely affected.
  • Finance Minister’s statement on Thursday that the financial crisis facing the States is a result of an “act of God” is symptomatic of the callousness with which the Modi government treats State governments.
  • This abdicationof responsibility strikes a cruel blow to the social contract that exists between the Government of India and State governments, who are equal representatives of the 1.3 billion citizens of India.

The Basis:

  • The Goods and Services Tax (GST) regime was built on the promise that if States faced revenue deficits after the GST’s introduction, the Centre would make good the loss in the first five years.
  • It was on the basis of this commitment that States extended their support to GST.
  • States sacrificed their constitutionally granted powers of taxation in the national interest. That allowed the Centre to announce the dawn of “one nation one tax” at the stroke of midnight in 2017.
  • When the GST compensation cess exceeded the amount that had to be paid to States, the Central government absorbed the surplus.
  • Now, the economy has slowed down dramatically and the resources raised are insufficient.
  • Instead of exploring other viable options, the Centre is orchestrating a charade and raising questions about whether it is legally accountable to pay compensation.
  • A reading of the Goods and Services Tax (Compensation to States) Act 2017 and the Constitution 101st Amendment answer these questions affirmatively. Alas, the government’s objective is to obfuscate.
  • It is one thing to say that there are no funds available but entirely another to assert that there is no commitment to pay compensation.
  • This commitment has a history that begins with United Progressive Alliance era when many BJP-ruled States strongly pitched for a compensation mechanism to be a part of the Constitution itself.
  • Paragraph 92 of the Standing Committee report shows that the Centre assured payment of compensation for a specified period, if there were such a loss.

Assurance made:

  • When the Modi government introduced the GST compensation cess, many States pointed out that proceeds from the cess may be inadequate to fund the losses faced by States after the rollout of GST.
  • Allaying these apprehensions, the central government made the assurance that it would provide funds to meet States’ deficits.
  • In the seventh meeting of the GST Council, the Chairman (then Finance Minister Arun Jaitley), observed that it was the constitutional commitment of the central government to provide cent per cent compensation.
  • This was reinforced in the eight meeting of the Council.
  • In the tenth meeting, the Secretary of the GST Council stated that the central government could raise resources by other means for compensation and this could then be recouped by continuing the cess beyond five years.
  • Therefore, there was never any ambiguityin the minds of States that succour will be offered by the Centre.
  • States never expected to be disappointed so early. The central government has let them down by thrusting on them two options, both of which involve borrowing by States.
  • This is akin to asking States to mortgage their future to sustain the present.
  • Cooperative federalism has been transformed into coercivefederalism.

Centre is best placed:

  • The central government has the ability to raise resources through means that are not available to States.
  • Monetary measures are the monopoly of the central government. Even borrowing is more efficient and less expensive if it is undertaken by the Central government.
  • Over the last six years, the Centre has continually cornered resources that should have been shared with States.
  • The Fourteenth Finance Commission allotted 42% of central government tax revenues to States.
  • However, Accountability Initiative’s analysis of State Budgets shows that States received only 30%of central tax collections during the 2015-19 period.
  • The Centre raised an estimated ₹3,69,111 crore revenue through cesses and surcharges in 2019-20 alone. These are not shareable with States.
  • Similarly, cesses on petroleum products have resulted in the Centre receiving 60% of petroleum tax revenues, with only 40% going to States. In 2013-14, the ratio was 50-50.


  • As equal representatives of the citizens of the federal republic of India, State governments expected the Centre to demonstrate empathy when they are bearing the bruntof the COVID-19 pandemic and lockdowns that were announced without consultation.
  • This is the most appropriate time to provide them relief through the Consolidated Fund of India.
  • Prime Minister proudly described GST as a ‘Good and Simple Tax’ which would usher in a glorious economic future for India.
  • Unfortunately, just three years later, the harsh reality is that States are staring at ‘grave and sordidtimes’ ahead.

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Prelims Questions:

Q.1)With reference to the International Day Commemorating the Victims of Acts of Violence Based on Religion or Belief, consider the following statements:

1. International Day Commemorating the Victims of Acts of Violence Based on Religion or Belief was observed on 21 August.
2. The day recognizes the importance of providing victims of acts of violence based on religion or belief and members of their families with appropriate support and assistance in accordance with applicable law.

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: B

Mains Questions:

Q.1) Describe the functions of GST council. What is the issue of compensating states for the shortfall in their goods and services tax (GST) collections? Also discuss the necessary steps need to be taken in this regard.