Despite denial of dues by the Centre, CM Stalin allocates funds for all schemes, says Finance Minister Thangam Thennarasu

The statement by Tamil Nadu Finance Minister Thangam Thennarasu regarding the Centre's alleged non-devolution of proportionate Goods and Services Tax (GST) funds to the state, despite Chief Minister M.K. Stalin allocating funds for all state schemes, brings to the forefront the persistent complexities and tensions in India's fiscal federalism. This issue is not merely a financial dispute; it touches upon the fundamental structure of Centre-state relations, state autonomy, and the efficacy of India's tax system.

**Background Context: The Evolution of Fiscal Federalism and GST**

India operates as a quasi-federal state, where both the Union and State governments have distinct powers and responsibilities, including taxation. The Constitution, particularly the Seventh Schedule, delineates these powers. Before 2017, indirect taxation was fragmented, with various central (e.g., excise duty, service tax) and state (e.g., VAT, entertainment tax) levies leading to a cascading effect and administrative complexities. This fragmented system often led to disputes over revenue sharing and collection.

The Goods and Services Tax (GST), introduced through the 101st Constitutional Amendment Act, 2016, was heralded as a landmark reform designed to create a unified national market, simplify taxation, and improve tax compliance. It subsumed multiple central and state indirect taxes into a single, destination-based consumption tax. A critical component of this new regime was the GST Council (established under Article 279A), a unique body comprising the Union Finance Minister (chairperson) and state finance ministers, which decides on GST rates, exemptions, and administrative procedures. To allay states' fears of revenue loss during the transition, the GST (Compensation to States) Act, 2017, guaranteed compensation for any revenue shortfall for a period of five years, ending in June 2022.

**What Happened: The Tamil Nadu Grievance**

The Tamil Nadu Finance Minister's statement highlights a core grievance: despite the state contributing significantly to the national GST pool, it perceives a disproportionate or inadequate return of funds from the Centre. This 'non-devolution of proportionate funds' can refer to several aspects: either the state's share of the Integrated GST (IGST) and Central GST (CGST) as per the GST Council's recommendations, or the general devolution of central taxes as recommended by the Finance Commission (under Article 280), or even the post-compensation scenario where states are now solely reliant on their share of GST revenues and Finance Commission grants. Many states, especially those with higher economic activity and tax collection, often argue that the current devolution formula, which considers factors like population, area, and income distance, does not adequately reward their fiscal performance and contributions.

**Key Stakeholders Involved**

1. **Government of India (Centre):** Responsible for collecting CGST and IGST, and for devolving funds to states as per constitutional provisions, Finance Commission recommendations, and GST Council decisions. The Union Ministry of Finance plays a pivotal role.

2. **Government of Tamil Nadu (State):** As a state government, it is responsible for managing its finances, raising revenue (SGST), and implementing welfare and development schemes. It is a key claimant in the fiscal federalism framework.

3. **GST Council:** The primary body for all GST-related decisions, including revenue sharing mechanisms and rates. Its recommendations are crucial for both Centre and states.

4. **Finance Commission:** A constitutional body constituted every five years (Article 280) to make recommendations on the distribution of net proceeds of taxes between the Union and the states, and among the states themselves. Its recommendations are highly influential in shaping Centre-state financial relations.

**Why This Matters for India: Significance and Implications**

This issue is profoundly significant for India's governance and economic stability. Firstly, it underscores the ongoing challenges to **fiscal federalism**. For states to effectively govern and deliver public services (e.g., health, education, infrastructure, law and order – all subjects in the State List of the Seventh Schedule), they need adequate and predictable financial resources. A perceived shortfall in central transfers can cripple state budgets, delay projects, and impact public welfare.

Secondly, it affects **state autonomy**. When states feel financially constrained by the Centre, their ability to chart independent policy courses and respond to local needs is curtailed, potentially leading to political friction and undermining the spirit of cooperative federalism that GST was meant to foster. The expiry of the GST compensation mechanism in June 2022 has exacerbated these concerns, as states are now fully exposed to the fluctuations in GST revenues without the safety net.

Thirdly, the dispute has **economic implications**. Reduced funds for states can lead to cuts in capital expenditure, affecting infrastructure development and job creation. It can also impact social sector spending, widening regional disparities. Politically, such disputes often become flashpoints between the Centre and states ruled by opposition parties, potentially leading to greater political polarization.

**Future Implications**

The ongoing debate signals a need for a more robust and transparent mechanism for revenue sharing. States might continue to demand either an extension of the compensation mechanism or a revised devolution formula from the Finance Commission that better accounts for their revenue contributions and expenditure needs. The GST Council will remain a crucial forum for these discussions, and its ability to forge consensus will be vital. Future Finance Commissions will face the complex task of balancing equity among states with rewarding fiscal performance, all while ensuring both levels of government have sufficient resources to fulfill their constitutional mandates. The outcome of these discussions will significantly influence India's economic growth trajectory and the health of its federal structure.

**Related Constitutional Articles, Acts, or Policies:**

* **Article 280:** Constitutes the Finance Commission, which recommends the distribution of tax revenues between the Centre and states.

* **Article 279A:** Deals with the GST Council, its composition, and functions.

* **Article 246A:** Grants Parliament and state legislatures concurrent power to make laws with respect to GST.

* **101st Constitutional Amendment Act, 2016:** Introduced the Goods and Services Tax.

* **GST (Compensation to States) Act, 2017:** Provided for compensation to states for revenue losses arising from GST implementation for five years.