GST leading to Combative Federalism – UPSC GS3

  • There has been friction between centre and state over the lack of compensation cess.
  • It is a “consumption-based destination tax”, which means that the revenue will go to the state in which the goods/services are consumed.
  • GST collection has not grown as estimated and hence states are demanding extending of compensation tax.
Issue between the center-state over GST:
  • Lack of trust between Centre and States.
  • Lack of consensus over the decision-making.
  • The delay in the release of compensation- cess, further increases friction between center-state relations.
What are the steps that can be initiated by the state to cover the financial loss?
  • The state governments are short of funds, so the industry may face financial issues as the state may aggressively use its power to augment its finances.
  • Attachment of bank account, blocking of the input tax credit, arrests are likely to rise to increase tax collections.

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