This paper proposes about a powerful control mechanism of UPQC (Unified Power Quality Conditioner) work on voltage source inverter which can effectively compensate source current harmonics and also mitigate all voltage collapse such as dip, swell, voltage unbalances and harmonics. The consolidation of series and parallel active power filters sharing mutual DC bus capacitor forms UPQC. PI (Proportional Integral) controller is mainly used in order to maintain continual DC voltage along with the hysteresis current controller. The parallel and series power filters were designed using 3-phase voltage source inverter. The reference signals for shunt and series active power filters were obtained by Synchronous Reference Frame (SRF) theory and Power Reactive (PQ) theory respectively. By using these theories, reference signals were obtained which was fed to the controllers for generating switching pulses for parallel and series active filters. The UPQC dynamic performance is obtained through testing terms like the compensation of voltage, current harmonics and all voltage distortion associated with 3-phase 3-wire power system which is simulated using MATLAB-Simulink software.