GST Council and the issue of compensating States

GST (Goods and Services Tax) replaced many state-level taxes.

To make States agree, the Centre promised 14% annual revenue growth compensation for 5 years (2017–2022).

Now, with new GST rate cuts, States fear further revenue loss.

But in the latest GST Council meeting, the issue of compensation to States was not even discussed.

Telangana Deputy CM and Kerala Finance Minister said that GST has increased States’ dependence on the Centre and reduced their own ability to raise funds.

The Centre had earlier promised States a 14% annual growth in tax revenues under GST. In reality, growth has been only 7–8% in the last five years.

States bear 64% of total government expenditure, but the Centre gets about 64% of total revenue. This mismatch weakens States’ finances.

The 15th Finance Commission recommended the Centre should share 41% of its revenue with States.

But nearly 20% of the Centre’s revenue comes from cesses, which are not shared.

This reduces the actual share of States to only 30–32%.

Eight States, including Kerala and Telangana, met before the GST Council to demand compensation.

Kerala estimates its revenue loss at ₹8,000–10,000 crore.

No detailed study report was provided to the GST rate rationalisation committee this time; only the Union Government’s suggestions were considered.

A cess is an extra tax collected by the Central Government for a specific purpose (like education or health).

Cesses are recognized in the Constitution under Article 277 and Article 270 (which outlines the revenue-sharing framework between the Union and States).

Unlike other taxes, cess money cannot be shared with States and must be used only for the purpose it was collected for.

The 80th Amendment formally amended Article 270, explicitly excluding cesses and surcharges from the divisible pool (revenue from cesses is not shared with states).

If not spent in a year, it is carried forward for the same purpose in later years.

Every taxpayer who pays income tax also pays a 4% cess on the tax amount (including surcharge).

Example: If your income tax is ₹10,000, cess = 4% of 10,000 = ₹400. Total tax = ₹10,400.

2004 – 2% Education Cess introduced (to improve primary education).

2007 – 1% Secondary and Higher Education Cess added (to fund higher education).

Total became 3%.

2018 – Both above were replaced by 4% Health and Education Cess (to fund healthcare + education needs, especially for poor and rural families).

Both upheld exclusion of surcharges from divisible pool.

Advised the Centre to reduce reliance on cess and surcharge since States lose revenue.