Abstract: Reactive power compensation and elimination of harmonics are necessary to provide high power quality for an AC system. The compensation of reactive power in an AC system using STATCOM to improve power quality is presented in this study. For the compensation of reactive power in power systems, Static Synchronous Compensator (STATCOM) is used which is a Flexible Alternating Current Transmission Systems (FACTS) device employing power electronic switches. STATCOM consists of a Voltage Source Converter (VSC). The VSC, which acts as a variable capacitive/inductive load is connected across the AC transmission line through a coupling reactor and this VSC improves the power factor by giving/consuming reactive power according to its output voltage and thus compensating the reactive power. The topology of VSC implemented here is a cascaded multilevel inverter employing bidirectional switches. By using a multilevel inverter instead of a voltage source inverter, the harmonics produced by the power electronic devices can be mitigated. The multilevel inverter topology suggested here is more advantageous than the conventional topologies. In this study, the simulation of suggested multilevel inverter for five level output and implementation of the same as STATCOM for reactive power compensation has been performed using MATLAB/Simulink and corresponding outputs obtained are reported.