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The Editorial Analysis- A Critical Juncture

GST Regime and GST Compensation to States- Relevance for UPSC Exam

GS Paper 2: Federalism- Functions and responsibilities of the Union and the States; Issues and challenges pertaining to the federal structure.

Recently, the Centre said it has released States’ outstanding GST compensation dues of almost ₹87,000 crores.
The gap between revenues and the assured level promised to States under the GST compensation compact has narrowed.
- This has narrowed to less than ₹5,000 crore a month, from over ₹19,600 crore averaged in the previous four months.

Recent move of central government marks a shift in stance as just a month earlier, the Finance Ministry had signalled that States’ dues worth over ₹78,000 crores pending for the last four months of 2021-22.
- Finance Ministry said that it will be released ‘as and when’ adequate GST compensation cess collections accrue.
By May 31, the Centre said there was about ₹25,000 crore in the GST compensation fund and forked out the balance from its own coffers to be adjusted from future GST cess levies on sin goods, such as cars.
The record GST collection of over ₹1.67 lakh crore in April helped, no doubt, and although May revenues have fallen 15.9% to ₹1.41 lakh crore, sustaining this two-month average could ease fiscal worries for both the Centre and the States.
Concerns: high inflation, which the Government hinted could compel a pause in an impending rejig of the GST rate structure, has been a key factor for rising GST revenues.

For States: The stated intent for this changed strategy makes eminent sense — to help States manage their resources and ensure spending, particularly of the capital variety to pump-prime the economy, happens smoothly through 2022-23.
- States have been anxious about revenue inflows once the five-year GST compensation window expires this month.
For Centre-state relations: The gesture to remit dues without waiting for cess accruals will also help cool the temperature of the Centre-States’ fiscal parleys.
- Centre-States’ fiscal parley flared up afresh after some tangential remarks from the apex court on the nature of the GST Council’s recommendations.
For Consumers: this could mean a further extension in the levy of GST compensation cess beyond March 2026- by when borrowings made over the past two years to bridge shortfalls in cess collections, were to be repaid.

GST Council must take a nuanced view by assessing whether the GST rate restructuring should be deferred because of fears of higher inflation, or reoriented to lower inflation while broadening the tax net and easing compliance.

shivam