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?

The Goods and Services Tax subsumed states' key indirect taxes into a single destination-based levy. Since states surrendered fiscal autonomy, the GST (Compensation to States) Act, 2017 guaranteed them compensation for revenue loss.

Rationale of the Compensation Act

• To secure states' consent for GST, they were assured a 14 per cent annual growth in protected revenue over the 2015-16 base for five years (up to June 2022).
• Any shortfall was to be met from a dedicated Compensation Cess levied on demerit and luxury goods (tobacco, aerated drinks, automobiles).
• It cushioned states against transition uncertainty and made the reform politically feasible.

COVID-19 impact and federal tensions

• The pandemic and slowdown depressed consumption, so cess collections fell far short of the compensation owed, creating a large gap.
• The Centre distinguished shortfall due to 'GST implementation' from that due to an 'act of God' (COVID), initially limiting its liability — states objected sharply.
• Opposition-ruled states saw this as an erosion of the compensation guarantee and of fiscal federalism.
• Resolution came through Centre-facilitated back-to-back borrowing passed on to states, and later extension of the cess to repay these loans.

The episode exposed the strains in India's fiscal federalism and the GST Council's consensus model, underlining the need for trust, transparent data-sharing and cooperative resolution of Centre-state fiscal disputes.