Goods and Services Tax (GST)

Issues with special treatment of states with higher contribution to GST pool


From UPSC perspective, the following things are important :

Prelims level: GST Council

Mains level: Paper 3- Issues with special treatment to states contributing more to GST pool

The article highlights the issues with the demand for special treatment of states with higher contribution to GST pool.

Debate on GST

  • The issue of GST concessions on COVID relief has brought into focus the structural flaws in the GST structure.
  • In this process, the structure and design of GST — essentially a tax on consumption — is being questioned.
  • The issue of  “rich” states versus “poor” ones, the decision-making process in the GST Council, and the representation of various states in the Council have also come into the focus.

Why States should be treated equally in GST Council

1) Consensus on GST

  • The structure and design of GST and its basic features, as enshrined in the 101st Constitution Amendment Act, were unanimously adopted and endorsed by Parliament.
  • The broader and finer points of the law, were thoroughly discussed and debated and recommended by the GST Council after a complete consensus.
  • These were further debated and approved by not only Parliament but also by each of the state legislatures.
  • There was complete consensus even on the issue of delegated legislation — something unheard of in a federal environment.

2) Equality of all states

  • In this process of consensus building, no state was accorded even the slightest of special privilege.
  • That is why the consensus surrounding GST was unprecedented whether in India or any other federation.
  • Therefore, arguing for special treatment of some states is a dangerous idea, particularly in governance, and more so in a welfare state.
  • For, this would open the gates for elitist arguments such as special rights for bigger taxpayers, unequal voting rights in elections and preferential treatment for a select few.

3) Issues with greater contribution to GST revenue pool

  • It is not correct to argue that the GST collected in a state represents the revenue of that particular state for, under the GST mechanism, the tax deposited by a taxpayer in a state is a function of largely the value of supplies made by such taxpayer.
  • Approximately 50 per cent at the aggregate level and much higher at the state level of such values are of an inter-state nature.
  • In other words, most supplies made from any producing state are consumed elsewhere and the revenue in such a situation naturally and rightfully accrues to the destination state.

4) No transfers based on a formula

  • It is equally fallacious to argue that under GST, most of the revenue is collected by the Union and is transferred to the states on the basis of some formula.
  • The quantum of IGST revenue that is settled to any state is directly related to the returns filed in that state and the cross utilisation of credit exhibited in such returns; part of this settlement also comprises tax on supplies destined to that state, as exhibited in the returns of such suppliers.
  • There is no “formula” as such for “transfer” of revenue collected by the Centre. Instead, such “transfers” are directly relatable to the consumption (whether intermediate or final) in any state.

5) Locational or geographical advantage

  • There is another dimension to the higher revenue collection in a few states.
  • One may note that such states enjoy locational or geographical advantages, being mostly coastal and immensely suited to the needs of trade and distribution as also manufacturing.
  • Also, the disadvantage to such states on account of lower availability of certain vital minerals like coal and iron ore was undone by the principle of freight equalisation resorted to in the years following Independence.
  • This contributed, in no small measure, to the development of such states.

6) Unequal transfers of Central receipts

  • The argument of unequal transfers of central receipts also does not hold water, either in India or in any other federation.
  • As is well known, such transfers are intended for correcting horizontal fiscal imbalances in a federation.


We should thus concentrate on carrying forward the glorious traditions of perhaps the only institution of co-operative federalism that we have been able to build so far.

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