By R. Suryamurthy
When India rolled out the Goods and Services Tax in 2017, it was sold as a grand nation-building reform – a “one nation, one tax” revolution that would bind the economy together. Eight years later, it looks less like a fiscal triumph and more like a Trojan horse. Behind the shiny façade of efficiency and simplicity lies a blunt political project: centralising financial power in Delhi at the expense of the states.
The GST Council, once dressed up as a temple of cooperative federalism, is now an arena where states walk in like supplicants. The Centre sets the agenda, dictates the terms, and leaves states squabbling for crumbs. What was meant to guarantee buoyant, predictable revenues has instead left many states staring at fiscal cliffs, their autonomy hollowed out. The real casualty is not just revenue, but the federal balance of the Republic itself.
The numbers are not abstract; they are brutal. A new NIPFP working paper lays out the reality: most states collect less today, relative to their economies, than they did before GST. Punjab, already reeling from debt and farm crises, had SGST collections equal to 3.71% of GSDP in 2015-16. By 2023-24, that share collapsed to 2.81% – a staggering 24% fall. Kerala, celebrated for its welfare state, slipped from 2.99% to 2.68%. West Bengal, home to expansive subsidies and political populism, slid to 2.48% from 2.52%. Resource-rich states like Chhattisgarh and Odisha fared even worse, down from 3.27% to 2.44% and 3.36% to 2.50% respectively.
Strip away the temporary cushion of compensation, and states are naked before the storm. Punjab’s average revenue with compensation looked healthy at 4.30% between 2018-24, but take away that safety net, and it falls off a cliff. This is not merely a budgeting problem; it is existential. A state that cannot fund schools, hospitals, or roads without begging Delhi has ceased to be autonomous.
GST’s biggest promise was that it would grow with the economy. Instead, what states got was a rollercoaster. Tax buoyancy – how revenues rise with GDP – has been volatile, often collapsing below one. Translation: the economy grows, but state revenues don’t keep up.
In 2019-20, 15 of 18 major states saw negative GST growth even as their economies were expanding. In 2020-21, the pandemic cratered collections. The bounce in 2021-22 was less a triumph than a statistical trick – revenues looked higher only because the previous two years were so dismal. By 2023-24, states like Kerala, Telangana, and West Bengal again reported buoyancy below one. This is not a “money machine.” It is a slot machine where states keep pulling the lever, never sure if they’ll win enough to pay salaries.
The rot is structural. GST is a destination-based tax: revenue accrues where goods are consumed, not where they are produced. The outcome? Consumer-heavy states thrive, producers bleed. Maharashtra, India’s consumption powerhouse, has grown its SGST share from 3.08% in 2015-16 to 3.50% in 2023-24. Chhattisgarh and Odisha, which mine the coal and minerals that power India’s industries, languish far below their pre-GST levels.
This is economic injustice masquerading as reform. The states that bear the environmental scars of mining and industrialisation are stripped of revenue, while richer consuming states pocket the taxes. GST has institutionalised an inequity: the costs of production stay local, but the benefits flow elsewhere.
To soften the blow, the Centre dangled the carrot of compensation. For five years, states were paid the difference between their actual collections and a notional 14% annual growth path. It was a Faustian bargain: take the money, but surrender your tax sovereignty.
When the pandemic hit and cess collections fell, the Centre didn’t dip into its own pocket. Instead, it borrowed Rs2.69 lakh crore in back-to-back loans to keep states quiet. Now, the cess – levied on coal, tobacco, luxury cars – has been extended till March 2026, but only to repay those loans. States get nothing.
In plain terms: taxpayers in Chhattisgarh or Odisha are paying a cess on coal, but the proceeds don’t return to their state. They go to service a central loan. This is not fiscal federalism; it is fiscal colonialism.
The real game is political. A fiscally desperate state is a pliant state. When the Centre holds the purse strings, it gains leverage over everything else – borrowing limits, welfare schemes, even political dissent.
Want higher borrowing limits? Align your schemes with Delhi’s pet projects. Need emergency grants? Don’t rock the boat. The GST Council may function by “consensus,” but the underlying arithmetic is stacked. In reality, it is less a council than a command. This is why GST is not just an economic reform gone sour; it is a political instrument designed to discipline the states. A weak revenue base turns chief ministers into supplicants. A hollowed-out fiscal compact turns federalism into fiction.
The GST system is also haemorrhaging money. Between 2017-18 and 2023-24, the Directorate General of GST Intelligence detected 22,760 cases of evasion worth ?4.34 lakh crore, recovering barely a quarter. This is a gaping hole no state can afford.
And then there are the politically-timed rate cuts. To project itself as a champion against inflation, the Centre has repeatedly slashed GST rates on consumer goods. The costs? Borne by states, which lose revenue. Once again, the political optics in Delhi are financed by the fiscal pain of states.
Minor states fare no better. The NIPFP data shows Assam and Tripura slipping below their 2015-16 revenue ratios, while Himachal Pradesh, Uttarakhand, and Delhi consistently underperformed. Even with compensation, many couldn’t sustain their base-year levels. If GST cannot provide stability even to small economies, it is not a reform – it is a systemic design flaw.
Fixes exist, but they demand political will that Delhi shows little interest in. States need: A post-2026 compensation mechanism that doesn’t just service debt but genuinely fills the revenue gap. Origin-based levies on minerals, coal, and forest resources, so producing states aren’t bankrupted by their own endowments. Strict curbs on cesses and surcharges that bypass the divisible pool and deprive states of their rightful share.
A restructured GST Council where states’ voices carry real weight, not token votes drowned in central dominance. The GST experiment has morphed into a creeping centralisation project. It has gutted states’ ability to stand on their own fiscal feet, turned them into dependents, and handed the Centre a weapon of political control. This is not what federalism looks like; it is what its slow death feels like.
The 56th GST Council meeting in September is not just another bureaucratic ritual. It is a test of whether the Union still believes in sharing power, or whether India’s states will continue down the road of fiscal servitude. GST was supposed to unite India’s markets. Instead, it is dividing India’s polity. If left unreformed, it will not just bankrupt states – it will bankrupt the very idea of India’s federal union. (IPA Service)
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