Equitable distribution: on GST and the Parliament’s Public Accounts Committee report 

The 19th report of Parliament’s Public Accounts Committee (PAC) is appropriately scathing in its criticism of the Goods and Services Tax (GST) regime, introduced in July 2017 to simplify, unify and improve indirect tax compliance in India. At the outset, the PAC highlights a nearly 2% drop in indirect tax revenue between FY18 and FY20 — the first two years of GST prior to the COVID-19 pandemic. Among the several discrepancies flagged, it is the non-auditing and non-finalisation of the States’ Compensation Fund for over six years that stands out as particularly troubling. This has strained the functioning of what was meant to be a unified yet federal tax structure. The PAC notes the Centre’s failure to furnish the Compensation Fund Account to the Comptroller and Auditor General (CAG), a necessary step to certify and release timely compensation to States for revenue losses since the rollout of GST. The centralising tendencies of the GST regime have long been a point of contention for major revenue-generating States, many of which have raised concerns over diminished fiscal autonomy and sharp declines in indirect tax collections. As a destination-based tax, GST is levied at the point of consumption, adversely affecting manufacturing-heavy States.

To address these concerns, the GST (Compensation to States) Act, 2017, mandated a Compensation Fund and promised States a 14% annual revenue growth for five years (2017–22), using FY16 as the base year. However, many States have reported either non-receipt of funds or serious delays, which they say have negatively impacted governance. The PAC attributes this to the Centre’s indifferent approach. In one striking example, the PAC cites 2,447 inconsistencies — amounting to ₹32,577.73 crore — out of a sample of 10,667 cases — and criticises the Finance Ministry’s audit approach as “lackadaisical”. The PAC has recommended establishing a formal mechanism with the CAG to ensure timely audits and updates on pending cases. It also calls for a comprehensive review to develop a “GST 2.0” — a recommendation that is likely to resonate with States demanding a greater share of GST revenues, closer to 70%–80%, up from the current 50%.