UPSC Daily Editorial Analysis | 14 January 2022

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Extending GST Compensation

What the article is about? 

  • Analyses the issues associated with GST and GST compensation, and possible way ahead. 

Syllabus: GS-III Indian Economy, Fiscal Policy 


  • The GST became applicable from 1st July 2017 after the enactment of the 101st Constitution Amendment Act, 2016.
  • With GST, a large number of central and state indirect taxes merged into a single tax. 
  • It is essentially a consumption tax, levied at the final consumption point.

GST Compensation:

  • To allay the fears of States of possible revenue loss by implementing GST in the short term, the Union government promised to pay compensation for any loss of revenue in the evolutionary phase of five years.
  • The GST Compensation Act, 2017 guaranteed States that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
  • Compensation Cess: GST compensation is paid out of Compensation Cess every two months by the Centre to states.
    • An additional cess would be imposed on certain items and this cess would be used to pay compensation.
    • The items are pan masala, cigarettes and tobacco products, aerated water, caffeinated beverages, coal and certain passenger motor vehicles. 


  •  Revenue Shortfall: Pandemic and induced lockdown the state’s GST revenue gap in 2020-21 is expected to be about Rs. 3 lakh crore, while cess collections are only projected to reach Rs. 65,000 crore, leaving a shortfall of Rs. 2.35 lakh crore.
  • Inadequate Infrastructure: Technology platform couldn’t perform well; large-scale misuse of input tax credit using fake invoices.
  • Burden of pandemic: Economic slowdown and pandemic forced states to spend more even with the ongoing revenue shortfall. 

Way Ahead:

  • States are demanding an extension of the compensation scheme for another 5 year.
  • Reforming the structure to unify the rates is imperative and this cannot be done without the cooperation of States.
  • Reforming GST structure:
    • Reducing exemption items: Almost 50% of the consumption items included in the consumer price index are in the exemption list; broadening the base of the tax requires significant pruning of these items.
    • Bringing petroleum products, real estate etc under GST
    • Single rate slab: The present structure is far too complicated with four main rates (5%, 12%, 18% and 28%). 


The transition to GST is still in progress and an extension will provide comfort to States to help roll out crucial changes.

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