Syllabus: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure
Context: GST restructuring has abolished the GST compensation cess, merging it with regular tax. States fear revenue losses and erosion of fiscal autonomy as taxation power shifts to the GST Council where the Centre dominates decision-making.
Constitutional Framework
- Tax Powers:
- Article 246: Demarcates taxation powers between Centre (Union List) and States (State List); residuary power with Centre.
- Article 246A (2016): Enabled levy of Service Tax.
- 92nd Amendment: Introduced Service Tax.
- 101st Amendment (July 2017): Launched GST with destination-based taxation and common tax base for Centre and States.
- Centre-State Financial Relations:
- Articles 268-293: Define financial relations.
- Article 280: Finance Commission determines transfers to States.
- Article 282: Direct grants by Union; Article 275: Statutory grants through Finance Commission.
Finance Commission Devolution
- Evolution:
- 80th Amendment: Introduced global sharing principle (11th FC: 2000-2005).
- States’ share increased: 29.5% (11th FC) → 30.5% (12th FC) → 32% (13th FC) → 42% (14th FC) → 41% (post-J&K reorganization).
- Shortfall:
- Actual devolution consistently falls short due to rising cesses and surcharges (not in shareable pool).
- Cess and surcharge: ₹3.86 lakh crore (RE 2024-25), expected ₹4.23 lakh crore (BE 2025-26).
- States demand merger with shareable pool; Centre has refused.
States’ Fiscal Dependency
- Current Status:
- Central transfers = 44% of States’ revenue receipts (ranges from 72% for Bihar to 20% for Haryana).
- Nine States below 44%: Haryana (20%), Telangana (21%), Gujarat (28%), Maharashtra (28%), Karnataka (31%), Tamil Nadu (31%), Goa (33%), Kerala (34%), Odisha (41%).
- Tax Revenue vs Expenditure:
| Period | Tax Collection (Centre:States) | Revenue Expenditure (Centre:States) |
| Pre-GST (2012-17) | 67:33 | 47:53 |
| Post-GST (2018-23) | 67:33 | 48:52 |
- Key Issues:
- Centralization of taxing power with rising State expenditure responsibilities (health, education, agriculture, law and order).
- Heavy dependence creates liquidity problems and political concerns for Opposition-ruled States.
Proposed Solutions
- Canada Model:
- Federal government: Collects 46%, spends 40%.
- Sub-national governments: Collect 54%, spend 60% (more fiscal autonomy).
- Personal Income Tax Sharing:
- Share personal IT base between Centre and States (50:50 model similar to GST).
- Example: Personal IT base ₹13.57 lakh crore (BE 2025-26) shared 50:50 would reduce Central devolution from ₹14.22 lakh crore to ₹7.44 lakh crore.
- Alternative: Empower States to top up IT without major system changes.
- Benefits:
- Reduces fiscal dependence on Centre.
- Improves liquidity management.
- Progressive States benefit directly from higher tax base.
- Centre retains leverage through schemes, grants, and devolution.
Conclusion
- GST has improved efficiency but centralised fiscal powers.
- States face rising expenditure with limited revenue-raising capacity.
- A restructured tax-sharing framework ensuring greater fiscal autonomy, transparency, and equity is essential to strengthen cooperative federalism and maintain fiscal balance in India.
Q- “The introduction of GST has improved tax efficiency but compromised the fiscal autonomy of States.” Critically examine this statement in the context of Centre-State financial relations and suggest measures to restore fiscal balance. (15 Marks, 250 words)
