Restoring Fiscal Space for the States: Challenges in Indian Fiscal Federalism
The transition to GST and the end of the compensation period have significantly squeezed the fiscal space of Indian States. While GST was intended as a shared tax, States feel a loss of autonomy as the Centre dominates the GST Council. The article notes that actual tax devolution has consistently fallen short of Finance Commission recommendations due to the Centre's increasing reliance on cesses and surcharges, which are not shared with States. To restore fiscal balance, suggestions include restructuring GST slabs, merging the compensation cess with the regular tax, and empowering States to collect a share of personal income tax to reduce dependency.
Key Points
- The 15th Finance Commission recommended 41% tax devolution, but actual transfers are lower due to non-divisible cesses.
- The end of the GST compensation period in June 2022 has created a major revenue gap for many Indian States.
- Vertical fiscal imbalance persists as the Centre collects the majority of taxes while States handle most developmental spending.
- States are calling for a restructuring of the tax base, including a potential share in personal income tax (IT) collections.
Exam Facts
- Article 280 of the Constitution provides for the establishment of the Finance Commission.
- Article 246A was inserted by the 101st Amendment Act to allow for the levy of GST.
- The GST compensation period for States ended in June 2022.
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