PAC GST Reform Recommendations, A Wake-up Call for the Centre and a Boon for States
Why in News?
The 19th report of the Parliament’s Public Accounts Committee (PAC) has cast a critical light on the performance of the Goods and Services Tax (GST) regime since its introduction in 2017. The report is likely to reignite demands for reform from several Indian states. 
Introduction
The GST regime, rolled out in July 2017, aimed to simplify and unify India’s indirect tax structure. However, the PAC’s recent report reveals glaring shortcomings in its implementation and governance, prompting strong reactions from states and policy experts.
Key Issues Highlighted by the PAC
1. Decline in Indirect Tax Revenue
The PAC observed a 2% decline in indirect tax revenues between FY18 and FY20—two critical pre-pandemic years that should have seen stable or rising collections.
2. Compensation Fund Mismanagement
One of the most serious concerns is the non-auditing and non-finalisation of the States’ Compensation Fund for over six years. This delay has strained the federal structure and affected timely disbursal of compensation to states.
The Centre also failed to furnish the fund’s account details to the Comptroller and Auditor General (CAG), delaying certification and fund release.
3. Centralisation and State Discontent
The PAC noted that major revenue-generating states have raised concerns over GST’s centralising tendencies, erosion of fiscal autonomy, and sharp declines in collections, especially in manufacturing-heavy states affected by GST’s destination-based nature.
GST Compensation Act 2017: A Broken Promise?
The GST (Compensation to States) Act, 2017 promised states a 14% annual revenue growth for five years (2017–2022), using FY16 as the base. But many states reported delayed or no compensation, which they claim has hindered governance.
Audit Inconsistencies and Lax Oversight
The PAC highlighted that out of 10,667 cases reviewed, 2,447 inconsistencies worth ₹32,577.73 crore were found. It blamed the Finance Ministry for a “lackadaisical” audit approach, urging urgent reforms.
Recommendations by PAC
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Establish a formal mechanism with CAG for timely audits and status updates.
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Conduct a comprehensive GST review to develop “GST 2.0”.
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Increase states’ share of GST revenues from the current 50% to 70–80%, addressing long-standing state demands.
Conclusion
The PAC report is a reality check for the Centre and a call to action for reforming the GST framework. Its findings and recommendations are likely to resonate with states seeking more fiscal autonomy, accountability, and a fairer share in revenue distribution. If implemented, these reforms could steer India towards a more balanced and cooperative fiscal future.
Q&A Section
Q1. What is the main criticism of the GST regime by the PAC?
The PAC criticises the GST for causing a decline in indirect tax revenue and mishandling the Compensation Fund, which has led to strained centre-state fiscal relations.
Q2. What is the significance of the States’ Compensation Fund?
It was established to compensate states for revenue loss due to GST. However, delays and lack of audits have led to underpayments, affecting state governance.
Q3. How has GST affected manufacturing-heavy states?
As a destination-based tax, GST benefits consuming states rather than producing ones, negatively impacting revenue-rich, manufacturing-heavy states.
Q4. What are the audit issues highlighted by the PAC?
Out of 10,667 cases, 2,447 had inconsistencies worth over ₹32,000 crore, which the PAC attributes to poor auditing and oversight by the Finance Ministry.
Q5. What is GST 2.0, and how will it benefit states?
GST 2.0 is a proposed comprehensive review and reform plan to address flaws in the existing regime. It aims to increase state revenue shares and ensure better fund management.
