What Happened
- K.N. Harilal, Chairman of Kerala's 7th State Finance Commission, stated that GST is eroding the financial freedoms of states by concentrating indirect tax determination powers in the Union government.
- He argued that the situation — where indirect taxes are unilaterally determined by the Centre — usurps the financial maneuverability of the states.
- The critique highlights growing concerns among state governments that the GST framework has structurally weakened subnational fiscal independence.
- The expiry of the GST compensation cess mechanism (which formally ended March 31, 2026) has intensified these concerns, as states can no longer rely on assured compensation for revenue shortfalls.
- The GST 2.0 reform discussions are underway, and rate rationalization under these reforms has led to a 5.45% growth in Andhra Pradesh's February 2026 collections — yet states argue this growth masks their reduced fiscal sovereignty.
- Revenue decisions on luxury and sin goods, rate changes, and exemptions — all determined by the GST Council — reduce the independent fiscal space that states previously enjoyed under the pre-GST regime.
Static Topic Bridges
Constitutional Basis of GST — Article 246A and the 101st Amendment
Before GST, the Constitution gave Parliament exclusive power to tax services (Union List) and states exclusive power to tax sale of goods within their territories (State List Entry 54). This created a fragmented indirect tax system with cascading effects. The Constitution (101st Amendment) Act, 2016, introduced Article 246A, which grants simultaneous and concurrent legislative power to both Parliament and State Legislatures to make laws with respect to GST. This was a fundamental departure from the rigid Centre-State division of legislative powers under Schedule VII, as both levels of government now share tax-making authority for most goods and services.
- Constitutional amendment: 101st Constitutional Amendment Act, 2016 (received Presidential assent on September 8, 2016)
- Article inserted: Article 246A — GST legislative power (both Centre and states, concurrently)
- GST replaces: Central Excise Duty, Service Tax, VAT, Entry Tax, Octroi, and over a dozen other taxes
- Exclusions from GST: Petroleum (crude, natural gas, motor spirit, aviation turbine fuel, high speed diesel), alcohol for human consumption — these remain under state/central excise
- Article 269A: IGST (Inter-state GST) is collected by Centre and shared with states
Connection to this news: By making GST a concurrent subject determined through a council mechanism, states effectively ceded their unilateral power to set rates on goods — the source of Harilal's critique about eroding financial freedom.
GST Council — Article 279A, Composition, and Voting
The GST Council is a constitutional body established under Article 279A of the Constitution (inserted by the 101st Amendment Act, 2016). It is the apex decision-making body for all GST-related matters: rates, exemptions, thresholds, dispute resolution, and model GST laws. Its composition reflects cooperative federalism in design — all states and the Centre are represented — but critics argue the voting mechanism tilts in favour of the Centre.
- Constitutional provision: Article 279A
- Chairperson: Union Finance Minister
- Members: Union Minister of State (Finance/Revenue) + State Finance Ministers (or their nominees)
- Voting weights: Centre = 1/3 of total votes; All states combined = 2/3 of total votes
- Decision threshold: Three-fourths majority (75%) of weighted votes required
- Implication: Centre alone cannot pass a resolution (holds only 1/3), but a coalition of dissenting states cannot block a resolution if Centre + most states agree
- Secretariat: Located in New Delhi; GST Council meets periodically (56th meeting held in September 2024)
Connection to this news: While the design appears cooperative, critics like Harilal point out that in practice the Centre exerts decisive influence through the 1/3 vote plus its agenda-setting role, especially on rate decisions that directly affect state revenues.
GST Compensation Cess — Purpose, Duration, and Post-2026 Implications
When GST was introduced on July 1, 2017, states were concerned about revenue losses from surrendering their independent tax bases. To address this, the GST (Compensation to States) Act, 2017 guaranteed states a 14% annual revenue growth over a five-year period (2017-18 to 2021-22), with compensation funded through a GST Compensation Cess levied on sin goods (tobacco, aerated drinks, automobiles, coal). The cess was originally meant to end in June 2022. However, pandemic-related shortfalls led to the Centre borrowing Rs 2.69 lakh crore and extending the cess collection till March 31, 2026, purely to repay those loans — without any revenue-sharing with states.
- Legal basis: GST (Compensation to States) Act, 2017
- Original duration: 5 years (July 2017 – June 2022)
- Extended until: March 31, 2026 (to repay pandemic loans)
- Goods covered: Tobacco products, aerated beverages, motor vehicles, coal
- States' share post-June 2022: NIL — extended cess revenues went to repay Centre's loans
- Post-March 2026: Compensation cess on tobacco formally annulled from February 1, 2026 (56th GST Council decision); remaining cess may be rechristened as a health or clean energy cess
Connection to this news: The end of the compensation mechanism has removed a financial safety net for states, amplifying concerns about the loss of independent revenue-raising capacity under GST — the core of Harilal's argument.
Fiscal Federalism — Centre-State Financial Relations
Fiscal federalism in India refers to the division of financial resources and revenue-raising powers between the Centre and states. The Constitution originally envisaged a strong Centre with revenue buoyancy (income tax, customs, central excise) while states depended on grants and transfers. The Finance Commission (Article 280) is the primary constitutional mechanism for vertical devolution (Centre to states) and horizontal distribution (among states). Pre-GST, states had significant independent revenue sources in VAT, entry tax, and levies on alcohol and petroleum. GST's absorption of most state taxes has made states structurally more dependent on the Centre for revenue certainty.
- Finance Commission: Constitutional body under Article 280; recommends tax devolution and grants
- 15th Finance Commission: Recommended 41% vertical devolution of central taxes to states (reduced from 42% because of bifurcation of J&K)
- State Consolidated Fund: State revenues flow into the Consolidated Fund of States (Article 266)
- State's own revenues (post-GST): SGST, stamp duty, state excise (alcohol), land revenue, vehicle taxes, electricity duty
- Entry 8, State List: Intoxicating liquors (alcohol for human consumption) remains with states — a key residual revenue source
Connection to this news: Harilal's critique is rooted in the structural weakening of states' own revenue capacity under GST — a concern that directly implicates the principles of fiscal federalism and the role of the Finance Commission in compensating for reduced state autonomy.
Key Facts & Data
- 101st Constitutional Amendment Act: received Presidential assent September 8, 2016
- GST launched: July 1, 2017
- Article 246A: concurrent GST legislative power for Parliament and State Legislatures
- Article 279A: GST Council — Centre holds 1/3 votes, all states together hold 2/3; 3/4 majority needed for decisions
- GST Compensation Cess: originally ended June 2022, extended to March 31, 2026 (for pandemic loan repayment)
- Pandemic loans paid by Centre as back-to-back loans: Rs 1.1 lakh crore (2020-21) + Rs 1.59 lakh crore (2021-22)
- 15th Finance Commission recommendation: 41% of divisible pool to states
- Excluded from GST: petroleum products, alcohol for human consumption, real estate (partially)
- K.N. Harilal: Chairman, 7th Kerala State Finance Commission
- State Finance Commissions: Constituted under Article 243I and Article 243Y for local body finance devolution