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? (250 words)

The Goods and Services Tax (Compensation to States) Act of 2017 was enacted to provide compensation to states for any loss of revenue arising from the implementation of the Goods and Services Tax (GST). Under the GST regime, states are required to subsume several indirect taxes into a single tax, which could potentially result in a reduction in the revenue of states. The act provides for the creation of a GST compensation fund, which is financed through the levy of a cess on certain goods and services, and is used to compensate states for any revenue loss arising from the implementation of GST.

The COVID-19 pandemic has had a significant impact on the GST compensation fund and has created new federal tensions. The pandemic has resulted in a significant decline in economic activity and a reduction in the revenue of states, leading to a shortfall in the GST compensation fund. This has resulted in a delay in the payment of compensation to states and has created tension between the central government and the states. Additionally, the central government’s decision to borrow funds to meet the shortfall in the compensation fund has also been met with resistance from some states.

These developments have highlighted the challenges and tensions in the implementation of the GST regime and the need for effective mechanisms to address them. It has also underscored the need for cooperation and coordination between the central government and the states to address the challenges and tensions arising from the implementation of GST.

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