Context:
During a pre-Budget meeting, several States and Union Territories raised concerns over revenue losses due to GST rationalization, shrinking fiscal space, and erosion of fiscal powers.
Key Highlights:
- Revenue Shortfalls
- GST rate cuts (September 2025) led to losses:
- Karnataka: ₹5,000 crore shortfall this year; ₹9,000 crore annually.
- Kerala: ₹21,000 crore resource gap.
- States cite:
- Rising social sector commitments.
- Climate shocks.
- Urbanization pressures.
- Fiscal Federalism Concerns
- Demand to include cess and surcharge in divisible pool.
- States argue:
- They collect levies but do not share proportionately.
- Questioned methodology of GSDP estimation affecting borrowing limits.
- Funding Pattern Issues
- Call for simplified norms for:
- 50-year interest-free loans.
- Capital expenditure support.
- Concerns over funding structure of:
- Viksit Bharat-Guarantee for Rozgar and Ajeevika Mission (Gramin) replacing MGNREGA.
- Emphasis on equitable sharing in Centrally Sponsored Schemes (CSS).
- Support Mechanisms
- Scheme for Special Assistance to States for Capital Investment (SASCI) appreciated for asset creation.
- Demand for 50:50 sharing of excise duty on tobacco and cess on paan masala.
Relevant Prelims Points:
- GST Council:
- Constitutional body (Article 279A).
- Decides GST rates and structure.
- Divisible Pool:
- Portion of central taxes shared with states (Article 270).
- Finance Commission (Article 280):
- Recommends tax devolution.
- Cess & Surcharge:
- Not shareable with states.
- Centrally Sponsored Schemes (CSS):
- Jointly funded, implemented by states.
Relevant Mains Points:
GS 2 – Polity (Federalism)
- GST transformed India into a cooperative fiscal federal structure.
- States argue erosion of fiscal autonomy.
- Tension between:
- Uniform tax regime.
- State-specific fiscal needs.
GS 3 – Economy
- Shrinking fiscal space affects:
- Infrastructure investment.
- Welfare schemes.
- Climate-related expenditures increasing fiscal stress.
- Debate over:
- Inclusion of cess/surcharge in divisible pool.
- Revisiting GST compensation framework.
- Way Forward
- Revisit GST compensation and rationalization formula.
- Increase transparency in GSDP estimation methods.
- Expand divisible pool by limiting excessive cess usage.
- Strengthen institutional dialogue via GST Council.
- Promote fiscal responsibility alongside cooperative federalism.
UPSC Relevance:
GST reforms, Fiscal federalism, Centre-State relations, Public finance management, Cooperative federalism.