09 July 2025: The Hindu Editorial

1. A GST puzzle in the fiscal math

Source – Page 6, The Hindu Editorial

Topic: GS Paper 3 – Indian Economy, Taxation, Federalism

Context

The Goods and Services Tax (GST) regime marked a landmark reform in India’s indirect taxation system. However, recent fiscal data indicates declining trends in compensation cess and central revenue share, raising concerns over the sustainability of fiscal federalism and revenue neutrality.

Key Issues Raised:

• Shortfall in GST Compensation Cess:

  • The Centre had to resort to borrowing to compensate states after the cessation of the 5-year guaranteed compensation period (ended June 2022).

  • States now express concerns over insufficient funds affecting developmental spending.

• Erosion of Revenue Neutrality:

  • Originally, GST aimed to be revenue-neutral.

  • The effective GST rate has declined over time from 15.3% to 11.6% (as per RBI), due to frequent rate reductions and exemptions.

• Disproportionate Burden on Centre:

  • Centre’s share of GST revenue has been decreasing due to growing SGST collections and limited IGST availability.

  • Dependence on cess and surcharges, which are not part of the divisible pool, has increased.

Analysis and Constitutional Implications:

• Federal Tensions:

  • States’ dependence on central grants may increase due to reduced fiscal space.

  • GST Council consensus mechanism is under strain due to revenue disputes.

• Fiscal Consolidation Challenge:

  • With sluggish tax buoyancy and rising expenditure needs, both the Centre and States face a narrowing fiscal cushion.

• Need for Rationalization:

  • A broader GST base with fewer exemptions and a simpler rate structure is essential.

  • Reforming GST compensation mechanisms could restore trust among states.

Way Forward:

• Revise GST rate slabs to ensure buoyancy.

• Strengthen the institutional autonomy and functioning of the GST Council.

• Introduce medium-term GST revenue forecasting.

• Reconsider the role of cess and surcharges to ensure equitable sharing of tax resources.

Practice Question: The introduction of GST was aimed at streamlining India’s indirect tax regime and strengthening cooperative federalism. Critically examine how recent trends in GST revenue collection have impacted Centre-State fiscal relations.

Read more about –08 July 2025: The Hindu Editorial Analysis