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GST Restructuring and Fiscal Federalism in India

17 Oct 2025 GS 3 Economy


1. Context and Background

  • India’s Goods and Services Tax (GST) system has entered a new phase with restructuring of tax slabs.

  • The GST Compensation Cess has been abolished, merging with regular tax — ending the compensation era.

  • Expected to pass on ₹2 lakh crore in tax benefits to consumers.

  • Concerns: Some States claim no proper estimation of revenue loss; demand for compensation ignored.

2. GST and Fiscal Federalism

  • GST (2017): Introduced through the 101st Constitutional Amendment, creating a destination-based tax instead of origin-based.

  • Article 246A (92nd & 101st Amendments): Empowered both Centre and States to levy GST.

  • Shifted taxation power from States to the GST Council, reducing States’ fiscal autonomy.

  • GST Council Composition: Centre dominates; decisions affect States’ revenue independence.

3. Fiscal Policy and Centre-State Tax Powers

  • Article 246: Demarcates Union and State powers of taxation (Union List & State List).

  • Residuary powers with Parliament.

  • Fiscal imbalance:

    • Resource raising — centralised for efficiency.

    • Expenditure responsibility — decentralised for accountability.

4. Finance Commission and Devolution

  • Articles 268–293: Define Centre–State financial relations.

  • Article 280: Provides for the Finance Commission (FC) to determine tax transfers to States.

  • Issues Raised by States:

    • FC’s criteria penalise progressive States.

    • Inconsistency among FCs in applying weights.

    • Lack of fairness and transparency in fund flow.

Devolution Trend

Finance Commission

Share to States

11th (2000–05)

29.5%

12th

30.5%

13th

32%

14th

42%

15th (after J&K reorg)

41%

  • Despite higher recommendations, actual devolution fell short due to rise in cesses and surcharges.

5. Cess and Surcharge: The Central Advantage

  • Not shareable with States under Article 270.

  • 2024–25 (RE): ₹3.86 lakh crore

  • 2025–26 (BE): ₹4.23 lakh crore

  • States demand merger into shareable pool; Centre resists to retain spending leverage.

6. Dependence on Central Transfers

  • 44% of States’ revenue receipts come from Central transfers.

  • Variation across States:

    • High dependency: Bihar – 72%.

    • Low dependency: Haryana – 20%.

  • 9 States (incl. TN, MH, KA, GJ) below national average → better fiscal capacity.

7. Pre- and Post-GST Comparison

Period

Centre’s Share in Total Tax Revenue

States’ Share

Centre’s Share in Revenue Expenditure

States’ Share

Pre-GST (2012–17)

67%

33%

47%

53%

Post-GST (2018–23)

67%

33%

48%

52%

  • Observation:

    • Tax collection power remains centralised.

    • Expenditure burden on States increasing — especially for health, education, agriculture, local governance.

8. Emerging Concerns

  • States’ higher expenditure vs. limited revenue autonomy → liquidity stress.

  • Centralisation creates friction, especially with Opposition-ruled States.

  • Fear of political bias in allocation of funds and schemes.

9. Towards Fiscal Autonomy

  • Tamil Nadu set up a committee on Centre–State fiscal relations.

  • Reform Proposals:

    1. Share Personal Income Tax (PIT) between Centre and States (e.g., 50:50).

    2. Allow States to levy a surcharge/top-up on PIT.

    3. Follow Canadian Model –

      • Federal govt collects 46% & spends 40%.

      • Sub-national govts collect 54% & spend 60%.

10. Way Forward

  • Revisit tax-sharing principles in the spirit of cooperative federalism.

  • Ensure dynamic fiscal adjustment to match expenditure responsibilities.

  • Reduce dependence of States on Central transfers.

  • Promote greater fiscal autonomy to enable efficient service delivery and accountability.



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