Context:
The article discusses the growing concerns of Indian States over shrinking fiscal autonomy due to centralisation of taxation powers after the adoption of the Goods and Services Tax (GST) and increasing dependence on the Union government for financial transfers. It highlights demands for restructuring Centre–State fiscal relations to uphold the principle of cooperative federalism.
Key Highlights / Details
Impact of GST on States
- GST replaced multiple State-level taxes and shifted taxation powers to the GST Council, where the Centre has greater influence.
- GST Compensation Cess has now been abolished, raising concerns among revenue-deficit States.
- States allege that revenue loss estimates post-GST are understated and demand compensation continuation.
Centralisation Through Cess and Surcharge
- Cesses and surcharges collected by the Centre are not shareable with States under Article 270.
- Their growing use has reduced the actual tax devolution to States despite higher recommendations by Finance Commissions.
- 14th Finance Commission recommended 42%, reduced to 41% (post J&K reorganisation).
- However, actual devolution is lower due to rising cess and surcharge collections (₹4.23 lakh crore in 2025–26 BE).
Dependence on Central Transfers
- States depend on the Centre for 44% of their revenue receipts on average.
- Dependency is highest for Bihar (72%), lowest for Haryana (20%).
- Heavy reliance reduces fiscal autonomy and increases space for political pressure and conditional funding via CSS.
Finance Commission Concerns
- States claim bias in tax-sharing criteria, penalising demographically progressive States (like TN and Kerala).
- Criteria such as population weightage (2011 Census) seen as unfair.
Rising Expenditure Responsibilities
- States shoulder 52% of total revenue expenditure, handling critical sectors:
- Health
- Agriculture
- Education
- Law and order
- Local governance
Relevant Prelims Points
- Article 246 & 246A – taxation powers; GST introduced under 101st Constitutional Amendment.
- Article 280 – Finance Commission.
- Articles 275 & 282 – statutory and discretionary grants.
- GST Council – Article 279A.
- Vertical & Horizontal Devolution – terms used in intergovernmental fiscal transfers.
Relevant Mains Points
- Issues in fiscal federalism in India.
- Centralisation vs. cooperative federalism debate.
- GST and erosion of States’ financial autonomy.
- Reform suggestions:
- Share personal income tax with States.
- Merge cess and surcharge into divisible pool.
- Allow States to levy top-up taxes.
- Strengthen Finance Commission’s transparency.
- Reduce conditional transfers in CSS.