The main purpose of the Goods and Services Tax (GST) compensation fund is
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → To compensate states for the loss of revenue due to the implementation of GST.
The GST Compensation Fund was set up under the Goods and Services Tax (Compensation to States) Act, 2017. When GST replaced several state taxes in July 2017, the states feared a fall in their tax income, so the Centre promised to make good their shortfall in revenue for the first five years, from July 2017 to June 2022.
How the fund worked:
The shortfall was worked out against an assumed growth of 14% a year in each state’s revenue over the base year 2015-16.
The money came from a GST compensation cess on luxury and sin goods — tobacco products, pan masala, aerated drinks and motor cars — credited to the fund.