[Answered] Critically analyze the assertion that states deserve a greater share of central taxes in the post-GST era. Discuss its implications for India’s fiscal federalism, state autonomy, and balanced regional development.

Introduction

India’s fiscal federalism is anchored in the principles of cooperative federalism, wherein both the Centre and the States share responsibilities and resources. In the post-GST era, States have ceded significant taxation powers to the Centre. Against this backdrop, demands—such as Tamil Nadu’s recent proposal to raise States’ share in central taxes from 41% to 50%—have gained prominence. This reflects deeper tensions in Centre-State fiscal relations, raising critical questions about revenue adequacy, state autonomy, and cooperative governance.

Why States Deserve a Greater Share

1. Loss of Tax Autonomy Post-GST: With the introduction of the Goods and Services Tax (GST) in 2017, States gave up crucial revenue sources like VAT, entry tax, and octroi. Although the GST Council was envisaged as a cooperative platform, infrequent meetings and central dominance have diluted States’ say in tax policy decisions.
2. End of GST Compensation: The constitutional guarantee of compensation for GST revenue shortfall ended in June 2022. While States’ own tax revenue has improved modestly (from 6.6% of GSDP in 2017-18 to 7.2% in 2024-25), it still falls short of bridging the gap caused by GST subsumption.
3. Vertical Fiscal Imbalance: India’s Constitution assigns more expenditure responsibilities to States (health, education, law and order), but greater revenue powers to the Centre. This imbalance necessitates a fairer vertical devolution. The current 41% share, recommended by the 15th Finance Commission, also includes special allocations like for Jammu and Kashmir, effectively reducing the divisible pool for other States.

Implications for Fiscal Federalism and State Autonomy

1. Strengthening Cooperative Federalism: A larger share in central taxes can restore balance in fiscal arrangements and enhance mutual trust. It will allow States to plan long-term development without excessive reliance on centrally sponsored schemes (CSS), which often come with conditionalities and reduced flexibility.
2. Preserving State Autonomy: Centralization of revenue without commensurate devolution undermines the federal spirit. A more equitable tax sharing ratio empowers States to innovate policies suited to local needs, enhancing accountability and efficiency.
3. Balanced Regional Development: Enhanced fiscal space can help underdeveloped States invest more in infrastructure, human capital, and social welfare, reducing inter-state disparities. Without adequate funds, poorer States risk falling into a ‘low-development-low-revenue’ trap.

Counterarguments and Concerns

1. Centre’s Commitments: The Union government requires substantial funds for national security, disaster management, and strategic infrastructure. Raising the States’ share could constrain its ability to meet these obligations.
2. Need for Fiscal Discipline: Greater devolution must be accompanied by improved fiscal prudence and accountability mechanisms at the State level. Without reforms in public finance management, increased funds may not translate into better outcomes.
3. Horizontal Equity: Higher vertical devolution must be balanced with equitable horizontal distribution to avoid favouring better-performing States disproportionately.

Conclusion

While the assertion that States deserve a greater share of central taxes post-GST is valid and timely, it must be carefully implemented with safeguards. A reimagined fiscal federalism—characterized by autonomy, accountability, and collaboration—can be the cornerstone of India’s inclusive development journey. Strengthening institutional platforms like the GST Council and the NITI Aayog Governing Council is equally crucial to making “Team India” a substantive rather than rhetorical goal.