GST and State Autonomy Explained

The Goods and Services Tax, implemented on July 1, 2017, was the most fundamental reform of India's indirect tax system since independence. It replaced a complex, multi-layered structure of central excise, service tax, state VAT, entry tax, luxury tax, and a dozen other levies with a single integrated tax collected simultaneously by the Centre (CGST) and states (SGST) on intra-state supplies, and by the Centre alone on inter-state supplies (IGST). 

The 101st Constitutional Amendment that enabled it inserted Article 246A — granting both Parliament and state legislatures simultaneous constitutional power to legislate on GST — and Article 279A, establishing the GST Council as the constitutional forum for Centre-state GST coordination. In constitutional terms, GST represented a significant exercise in cooperative federalism: states voluntarily surrendered their largest independent revenue sources (VAT, entry tax) in exchange for inclusion in a more efficient, revenue-productive tax system.

Representational Image: GST and State Autonomy Explained

The bargain involved a central guarantee: states were promised compensation for any revenue shortfall below 14% annual growth from a 2015–16 base revenue for five years. This guarantee ran from July 2017 to June 2022. The five-year period was largely positive — states received compensation payments and GST revenue grew — though the COVID-19 pandemic (2020–22) disrupted collections, forcing the Centre to borrow and lend the compensation rather than paying directly, a distinction that states contested. After June 2022, the compensation guarantee expired and states assumed the full revenue risk of GST collections. 

Manufacturing-heavy states — Kerala, Maharashtra, Punjab, Karnataka — found themselves at a structural disadvantage under the destination-based GST collection model (tax goes to where goods are consumed, not where they are produced), while consumption-heavy states benefited. This redistribution of revenue, without a permanent equalisation mechanism, has been the central fiscal federalism tension of the post-GST period.

What You Need to Know

• Article 246A of the Constitution (inserted by the 101st Amendment, 2016) gives both Parliament and state legislatures concurrent power to make laws on GST; Parliament has exclusive power over inter-state GST (IGST); Article 279A establishes the GST Council as a constitutional recommendatory body.
• The Supreme Court in Union of India v. Mohit Minerals (2022) held that the GST Council's recommendations are "recommendatory" and not binding on Parliament or state legislatures, preserving both central and state legislative autonomy within the GST framework.
• States currently receive State GST (SGST) — equal to the CGST rate on intra-state supplies — as their primary GST revenue; petroleum products (crude oil, natural gas, petrol, diesel, aviation turbine fuel) and alcohol remain outside GST and continue to be taxed by Centre and states separately, preserving states' most revenue-productive own-tax sources outside the GST system.
• The GST compensation guarantee expired on June 30, 2022; states including Kerala, Punjab, and West Bengal suffered revenue shortfalls after expiry; the 16th Finance Commission did not recommend a permanent replacement mechanism; states argue they need either higher vertical devolution or a new revenue equalisation formula to compensate for the structural shift to destination-based taxation.
• The GST Council operates by weighted voting: the Centre has one-third of total votes; all states together have two-thirds; a 75% majority is required for most decisions — this structure gives the Centre a veto on any decision (since any Centre dissent means the 75% threshold is effectively unreachable without broad state consensus) while states' voting weight is higher in absolute numbers.

How It Works in Practice

1. Dual GST structure: Every taxable transaction in India now involves two tax streams — central GST (CGST) and state GST (SGST) on intra-state supplies, both collected by the Centre and then apportioned. For inter-state supplies, only IGST is levied and collected by the Centre; a portion is then apportioned to the state of consumption. The GST Network (GSTN) technology platform handles filing, verification, and credit matching for billions of transactions.

2. GST Council decision-making: The GST Council meets regularly — quarterly in ordinary course, specially when needed — to recommend rates, exemptions, administrative procedures, and dispute resolution. Key decisions (rate changes, inclusion/exclusion of products) require 75% majority. In practice, decisions have been made largely by consensus, though southern states and larger states have increasingly used the Council forum to press for compensatory adjustments.

3. Revenue neutrality and the post-compensation challenge: GST was designed to be revenue-neutral for states in the long run, with the compensation mechanism providing a bridge. Post-compensation, the challenge is that states with high manufacturing have permanently lower SGST collection relative to their pre-GST VAT revenue, because destination-based GST transfers revenue to consuming states. No permanent mechanism compensates for this structural redistribution.

4. Outside-GST revenues as state lifeline: Alcohol excise, petroleum taxes (on products still outside GST), stamp duties, and vehicle taxes remain states' primary independent revenue sources. States with high alcohol and petroleum consumption (Maharashtra, Tamil Nadu, Karnataka) generate substantial own revenue from these outside-GST sources. This explains why states have resisted full petroleum-product inclusion in GST — it would eliminate their most lucrative independent revenue source.

5. The GST debt controversy: During COVID-19 (2020–21), the Centre could not fully fund the compensation guarantee from the GST Compensation Cess. Rather than borrowing in the Centre's name to fund compensation, it offered states a choice between borrowing against future cess collections or accepting a lower payment. Most states accepted under protest, and the controversy about whether the Centre fully met its constitutional commitment remains unresolved in some states' view.

What People Often Misunderstand

• GST was a voluntary federal bargain, not a central imposition: States agreed to give up their major independent taxes; this required their legislative ratification (since constitutional amendment required Rajya Sabha approval) and involved extensive consultation; the bargain was genuinely negotiated, not imposed.
• The GST Council is not a decision-making body — it recommends: Post-Mohit Minerals (2022), it is constitutionally confirmed that GST Council recommendations are not automatically law; both Parliament and state legislatures must separately enact legislation to implement rate and rule changes; the Council is the coordination forum, not the legislator.
• Alcohol and petroleum exclusions from GST are state choices, not oversights: States specifically insisted on keeping alcohol and petroleum outside GST to preserve their own-revenue base; including them would significantly increase GST collections but at the cost of state fiscal independence.
• Southern states' GST resentment has a fiscal logic: States like Kerala, Tamil Nadu, and Karnataka are net contributors to the national GST pool — their consumption and GSTN compliance generates more IGST than they receive back; the compensation guarantee partially offset this, but its expiry removed the protective buffer.
• GST does not cover all of India's indirect taxation: In addition to petroleum and alcohol exceptions, there are still multiple state-level cesses, levies, and charges that operate alongside GST; the "one nation one tax" aspiration has not been fully achieved, though the simplification is dramatic relative to the pre-GST regime.

What Changes Over Time

The post-2022 GST period has been characterised by persistent state fiscal stress among manufacturing-heavy states, calls for petroleum inclusion in GST, debates about the compensation mechanism's replacement, and GST Council disputes over rate rationalisation. The 16th Finance Commission's 2026–31 framework provides no dedicated GST compensation replacement mechanism. The Tax TMI analysis from July 2025 notes that "without consensus-based decision-making, the Council risks becoming an arena for political contestation rather than cooperative policy formulation." The Supreme Court may eventually be asked to settle constitutional questions about the compensation commitment's enforceability — a question that would directly affect Centre-state fiscal relations for years.

Sources and Further Reading

• GKToday — Article 246A: https://www.gktoday.in/article-246a-2/
• Tax TMI — GST@8 Federal Fabric: https://www.taxtmi.com/article/detailed?id=14755
• Medium/Constitutional Laws — Federalism and the GST Scheme: https://medium.com/constitutional-laws/federalism-and-the-gst-scheme-a-delicate-balancing-act-4dd6ac724e60
• IJIRL — Centre-State Financial Relations under GST: https://ijirl.com/wp-content/uploads/2023/01/CENTER-STATE-FINANCIAL-RELATION-UNDER-THE-GST-REGIME-A-CRITICAL-STUDY.pdf
• IndConLawPhil — Fiscal Federalism and the GST Judgment: https://indconlawphil.wordpress.com/2022/05/23/guest-post-fiscal-federalism-and-the-centralising-drift-the-supreme-courts-gst-judgment/

(This series is part of a long-term editorial project to explain the structures, institutions, and practical realities of governance in India for a global audience. Designed as a 25-article briefing cluster on Federalism, States & Centre–State Relations, this vertical examines how power, money, and authority are distributed between New Delhi and India's states — from the Seventh Schedule, fiscal federalism, GST, Governors, and central agencies to Centre–state disputes, regional parties, and the evolving balance of the Indian Union. Written in an accessible format for diplomats, investors, researchers, academics, journalists, students, policymakers, civil society organisations, and international observers, the series seeks to explain both the constitutional design of Indian federalism and the political realities through which it operates in practice. This is Vertical 4 of a larger 20-vertical knowledge architecture being developed by IndianRepublic.in under the editorial direction of Saket Suman. All articles are protected under applicable copyright laws. All Rights Reserved.)