Fiscal Federalism in India: The Post-GST Strain on Centre-State Financial Relations
UPSC Relevance
Prelims: Indian Polity and Governance (Constitutional provisions on finance - Article 246, 246A, 275, 280, 282; Goods and Services Tax (GST) Council; Finance Commission); Indian Economy (GST, Cesses & Surcharges, Fiscal Devolution, Fiscal Imbalance).
Mains:
General Studies Paper 2 (Polity & Governance): Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.
General Studies Paper 3 (Economy): Government Budgeting; Indian Economy and issues relating to mobilization of resources, growth, development.
Key Highlights from the News
GST compensation cess discontinuation raises new concerns about states' financial future.
With the implementation of Goods and Services Tax (GST), states' taxation power decreased, making them more reliant on the GST Council. This significantly reduced states' fiscal autonomy.
The massive increase in cesses and surcharges collected by the Centre that are not part of the shareable pool of taxes reduces the total allocation states receive.
Many developed states, including Tamil Nadu and Kerala, heavily rely on Central transfers for their expenses.
There are discussions to re-examine the tax-sharing mechanism and to share personal income tax with states, similar to GST.
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