GST and State Fiscal Crisis: A Looming Threat to Federalism
The GST state fiscal crisis has increasingly strained the financial autonomy of Indian states. While GST was introduced in 2017 as a unified tax regime promising efficiency and revenue growth, the reality for state governments tells a different story.
Revenue Shortfalls and GST Realities
Despite initial hype, GST collections have underperformed compared to expectations. The average monthly growth rate of GST revenues between April 2022 and October 2024 was just 0.86%, and when adjusted for inflation, this drops to 0.43% — indicating near-stagnation. The promise of a 14% annual growth in state revenues post-GST has been largely unmet.
Case Insight: In Union of India vs Mohit Minerals Pvt. Ltd. (2022), the Supreme Court reinforced the importance of federal balance, highlighting how GST implementation affects state revenue sovereignty.
Centre-State Revenue Imbalance
States ceded 44% of their taxation rights to GST, compared to the Centre’s 28%. Simultaneously, the Centre increased reliance on surcharges and cesses, which are not shared with states. The share of surcharges and cesses in Gross Tax Revenue rose from 9.5% in 2013-14 to 14.8% in 2023-24.
| Year | Surcharges & Cesses Share |
|---|---|
| 2013-14 | 9.5% |
| 2020-21 | 20.5% |
| 2023-24 | 14.8% |
This practice deprives states of a significant portion of their rightful revenues, deepening the GST state fiscal crisis.
End of Compensation and Its Impact
The five-year GST compensation scheme ended in 2022, leaving states without the promised safety net. Many state governments now face severe fiscal constraints while the Centre limits their borrowing capacity. This creates a dual crisis: a state fiscal crisis and a federalism crisis.
The Case for Reforming GST
- Revenue Allocation: States need a larger share of GST revenues or a revival of compensation mechanisms.
- Federal Equity: The Centre must reconsider the use of non-shareable surcharges and cesses.
- Borrowing Limits: States should have more flexibility in borrowing to meet developmental needs.
Key Takeaways
- GST’s regressive impact disproportionately burdens poorer states.
- Revenue stagnation challenges state development responsibilities.
- Fiscal federalism requires balancing Centre-state revenue dynamics.