UPSC Mains 2020 GS3 Q12 — Fiscal federalism
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? (Answer in 250 words)
Question Decoded — examiner's intent
- Directive verbs
- ExplainHow
- Scope keywords
- Goods and Services Tax (Compensation to States) Act of 2017rationaleCOVID-19GST compensation fundfederal tensions
- Implicit sub-parts
- The 14% guaranteed growth rate formula and the 5-year transition period promise.
- Mechanisms of the Compensation Cess and the protected revenue concept.
- The 'Act of God' vs. systemic failure debate regarding revenue shortfall during the pandemic.
- Impact of market borrowings (Option 1 vs Option 2) on state fiscal autonomy.
- The extension of the cess beyond 2022 to repay interest on borrowed funds.
- Common pitfalls
- Focusing too much on the general benefits of GST (one nation one tax) instead of the specific Compensation Act.
- Failing to mention the 'Consolidated Fund of India' vs 'GST Compensation Fund' legal distinction.
- Neglecting the role of the GST Council as the forum where these tensions manifested.
- Ignoring the specific 14% growth benchmark which is the core of the 'rationale'.
- Vague discussion on COVID-19 without linking it to the specific 'cess collection gap'.
- Dimensions required
- Fiscal FederalismConstitutional (101st Amendment)Economic (Revenue gap analysis)Legal/Administrative (GST Council dynamics)Financial (Market borrowing and debt servicing)
- Marks allocation hint
Allocate 50-60 words to the rationale, focusing on the trust deficit and revenue protection. Dedicate 100 words to the COVID-19 impact on the fund's depletion and the ensuing shortfall. Spend the final 90 words on federal tensions, specifically the borrowing dispute and the erosion of states' fiscal space, concluding with the current status of the cess extension.
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