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UPSC CURRENT AFFAIRS – 29th March 2025

Home / UPSC / Current Affairs / PAC Report Calls for GST 2.0 & Fiscal Reforms

PAC Report Calls for GST 2.0 & Fiscal Reforms

Why in News?

  • The 19th report of the Public Accounts Committee (PAC) was tabled in Parliament on March 29, 2025.
  • It criticizes the functioning of the GST regime and raises serious concerns about fiscal transparency and state compensation.
  • The PAC has called for a “GST 2.0” reform model to ensure equitable revenue distribution and restored federal balance.
PAC Report Calls for GST 2.0 & Fiscal Reforms

Key Highlights from the PAC Report

  • Revenue Drop: Nearly 2% decline in indirect tax revenue between FY18 and FY20 (pre-COVID years).
  • No Audit of Compensation Fund:
    • The States’ Compensation Fund has not been audited or finalized for 6+ years.
    • The Centre did not submit accounts to the CAG, delaying disbursement to States.
  • Revenue Mismatches:
    • Audit of 10,667 cases revealed 2,447 inconsistencies, worth ₹32,577 crore.
  •  “Lackadaisical” Audit Approach: The PAC termed the Finance Ministry’s approach inefficient and negligent.
  • Delayed Compensation: Many States have not received dues or faced serious delays, harming governance and development.

Key Concepts

  • GST (Goods and Services Tax): A unified indirect tax, destination-based, rolled out in July 2017 to simplify tax compliance.
  • Destination-Based Taxation: Revenue accrues to the state where goods/services are consumed, not produced — hurts manufacturing States.
  • Compensation to States Act, 2017:
    • Promised 14% annual revenue growth (2017–22), based on FY16 as base year.
    • Funded by cess on sin/luxury goods (tobacco, coal, etc.).
  • CAG Audit: The Comptroller and Auditor General is responsible for auditing government accounts — without submission, no certification is possible.

Concerns Raised by the PAC

  • Centralisation of GST Regime: Major States feel the Centre dominates tax decisions, eroding State fiscal autonomy.
  • Loss of State Revenues: Manufacturing states report sharp declines in revenue after GST rollout.
  • Vertical Fiscal Imbalance: States have more responsibilities but fewer resources, increasing dependence on the Centre.
  • Demand for Revenue Share Revision:
    • Currently, GST revenue is shared 50:50 between Centre and States.
    • States demand 70–80% share, citing rising expenditure burdens.

PAC Recommendations

  • Formal Audit Mechanism: Establish institutional coordination between Centre and CAG for timely audits.
  • Transparency in Fund Management: Ensure regular submission and public availability of Compensation Fund records.
  • Launch of GST 2.0:
    • Comprehensive review of current GST structure.
    • Reforms in compliance, compensation mechanism, revenue sharing, and audit accountability.
    • Restore the spirit of cooperative federalism.

Why It Matters

  • Trust Deficit: Delays and opacity have strained Centre–State relations.
  • Federal Principles Undermined: GST was meant to unify, but may now be weakening federal balance.
  • Reform Opportunity: GST 2.0 can offer a more equitable, accountable, and efficient framework if implemented with consensus.

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