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Focus: GS-III Indian Economy

Why in news?

The Centre likely to push for a market borrowing mechanism that will leverage states’ recently enhanced borrowing limits to temporarily plug the hole in their finances caused by a shortfall in revenue and the Centre’s inability to compensate them – and states ruled by non-National Democratic Alliance parties likely to, in turn, push for the compensation itself in the scheduled meeting of the Goods and Services Tax (GST) Council.


  • The special meeting of the council has been convened to discuss how to compensate states for their revenue shortfall at a time when the economy is facing headwinds and the compensation cess kitty for 2020-21 is almost empty.
  • Debt raised from market borrowings will be repaid from the compensation cess fund.
  • Other options, such as levying cess on more items, increasing cess rates on existing products or raising overall GST rates to raise revenue appear difficult at a time when demand is already subdued and the economy is badly hit by the Covid-19 pandemic.
  • As cess collection fell sharply due to subdued business activities, states could not be paid compensation on time.

Constitutional Guarantee to states

  • It is surprising that that the constitutional guarantee given to the States is being interpreted in a manner that the Centre is not responsible to compensate the States and it is the States (in the GST Council) which will have to find means to compensate themselves.
  • The GST law assures states a 14% increase in their annual revenue for five years from July 1, 2017, and also guarantees them that their revenue shortfall, if any, will be made good through the compensation cess levied on luxury goods and sin products such as liquor, cigarettes, aerated water, automobiles, coal and tobacco products.
  • Some states have misconception that it is the commitment of the Union government to compensate states, therefore, the central government should borrow the money to pay compensation to states and union territories, the officials mentioned above added. In fact, paying compensation is the collective commitment of both Union and state government, and the GST Council is the apex body that will take a decision on this matter.

Click Here to read more about GST Council

-Source: Hindustan Times

December 2023