GST Clash: Supreme Court Clarity vs States’ Revenue Squeeze
PM Narendra Modi speaks after inaugurating Kartavya Bhavan in New Delhi! (Image X.com)
GST’s story is far from over; it remains India’s boldest experiment in shared fiscal sovereignty, one that demands political maturity rather than courtroom brinkmanship to succeed.
By P SESH KUMAR
NEW DELHI, August 31, 2025 —India’s Goods and Services Tax (GST) was sold as the ultimate symbol of cooperative federalism, a tax revolution meant to replace a messy web of levies with a sleek, unified system. But eight years in, the GST debate has mutated into a tug-of-war between Centre and States over money, power, and the meaning of “cooperation.”
Calls to allocate all GST revenue exclusively to States echo in political corridors, framed as a solution to fiscal stress and developmental disparity. Yet, this simplistic prescription hides the deep constitutional engineering of GST, the Supreme Court’s careful balancing acts, and the stark reality that no level of government can walk away with the prize without breaking the very system they built.
The GST system is not a free-flowing pool of money that can be tipped entirely in favour of one side. It is stitched tightly into the Constitution, with Articles 246A, 269A and 270 creating a concurrent taxing power, a national GST Council to set rates and policies, and an intricate mechanism to apportion revenues.
The very idea of GST was to bind Centre and States in a shared fiscal destiny, replacing competing levies with a harmonised system that avoided cascading taxes and created a unified market. Demands that all GST be handed to States ignore this delicate design and risk blowing a crater in Union finances that fund national defence, foreign affairs, disaster relief, and other public goods no single state can shoulder alone.
The Union Budget for 2025–26 has pencilled in over ₹11.78 lakh crore from GST revenues, including compensation cess. Wiping out that stream would force the Centre to jack up direct taxes or borrowing, defeating the federal ideal it claims to protect.
This is not to deny that States are under immense fiscal pressure. The expiry of the five-year GST compensation guarantees in 2022 came as a shock, worsened by the pandemic, falling revenues, and Centre’s growing reliance on cesses and surcharges that sit outside the divisible pool.
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The share of these off-pool levies peaked near 20 per cent of gross tax revenue in 2020–21, slipping slightly but remaining stubbornly high, effectively shrinking what States receive despite a headline devolution of 41 per cent. That sting has sparked growing resentment, leading several States to consider litigation under Article 131 of the Constitution over delayed compensation payments.
While the Centre has extended the compensation cess until March 2026 to repay loans raised during COVID-19, the mood among States is far from conciliatory. In 2020, Kerala and others openly threatened court action over “unutilised cess funds,” forcing the Centre into borrowing arrangements.
More recently, Karnataka and Tamil Nadu have been at the forefront of opposition to any GST rate rationalisation that could reduce their collections without a credible safety net.
The legal disputes have reached the Supreme Court, which has played referee with an even hand. In 2018, the Court upheld the Compensation to States Act, rejecting claims that the cess represented double taxation or exceeded Parliament’s legislative competence.
Cess, it ruled, is a constitutionally valid, standalone levy to fund a specific purpose. In 2022, in a landmark judgment, the Court clarified that the GST Council’s decisions are recommendations, not binding diktats. Both Centre and States enjoy equal legislative powers, meaning States can, in theory, deviate from the Council’s prescriptions, though political and economic realities make such defiance rare.
More recently, in August 2025, the Court resolved confusion over Section 6(2)(b) of the CGST Act, ruling that summons or searches by one authority—Central or State—do not preclude the other from investigating the same matter, but once a Show Cause Notice is issued, the other cannot issue a parallel notice. The verdict draws a clear line between investigation and adjudication, reducing harassment for taxpayers while reaffirming the joint enforcement model.
Not all disputes are settled. Exporters of certain goods like branded chewing tobacco have fought against compensation cess even on zero-rated exports, arguing it violates neutrality and blocks working capital.
The Gujarat High Court has paused such cess collection and referred the issue to the GST Council, highlighting the need for nuanced reliefs. Similarly, States continue to push for a long-term compensation mechanism, fearing that the rate rationalisation exercise under discussion could strip them of up to ₹2 lakh crore in annual revenues. These tensions reveal that GST’s biggest stress point is not its design but its political economy: Centre and States are locked in a permanent negotiation over who bears the pain of reform.
Despite the friction, GST has matured impressively. Collections crossed ₹22 lakh crore in 2024–25, compliance has improved, and digital systems like e-way bills have deepened the tax base. Ironically, the very buoyancy States seek today is a direct outcome of the harmonisation they often criticise.
The path forward lies not in dismantling the system but in recalibrating its levers: pruning cesses and surcharges to expand the divisible pool, designing time-bound and formula-driven cushions for States during slab rationalisation, and widening the base to include petroleum and electricity in a revenue-neutral way. These steps would not only stabilise State finances but also reinforce the constitutional vision of GST as a shared national project.
The temptation to throw the entire GST pot to States is a populist shortcut that risks crippling national capacity while doing little for weaker States that rely on formula-driven redistribution. The Supreme Court’s rulings have already reaffirmed that GST is a carefully constructed cooperative framework, not a central takeover, with equal legislative power for States and the Centre and a Council that functions through consensus.
The real challenge is not constitutional centralisation but fiscal opacity—particularly the proliferation of off-pool cesses—and the lack of predictable, transparent compensation mechanisms. India’s federalism will be strengthened not by tearing down the GST bridge but by reinforcing it: broadening the tax base, rationalising rates, mainstreaming cesses, and ensuring States are not left stranded during reforms.
GST’s story is far from over; it remains India’s boldest experiment in shared fiscal sovereignty, one that demands political maturity rather than courtroom brinkmanship to succeed.
(This is an opinion piece, and views expressed are those of the author only)
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