Discuss how the GST Council has shaped Centre–State fiscal relations. What challenges does the end of compensation pose for States?

The GST Council was created under Article 279A by the Constitution (101st Amendment) Act, 2016 [1]. It is India's first institution of pooled fiscal sovereignty: the Union and the States jointly set a tax that neither can change alone. It has deepened cooperative federalism, but the end of compensation is now testing this bargain.

How the Council has shaped Centre–State fiscal relations

• Concurrent taxing power: Article 246A lets both Parliament and State legislatures levy GST. Article 269A provides for IGST on inter-State supplies, which is shared between the Centre and the States [1].
• Joint decision-making: the Union Finance Minister chairs the Council and State Finance Ministers are members. Decisions need three-fourths of weighted votes: the Centre holds one-third and the States together hold two-thirds [1].
• Capacity for major reform: the 56th meeting (September 2025) replaced four slabs with 5% and 18%, plus a 40% demerit rate [2].
• Revenue sharing in practice: in October 2026, SGST (₹51,340 cr) exceeded CGST (₹42,935 cr), out of gross GST of over ₹2.31 lakh crore [3].
• Strains: States gave up the power to set their own rates. The Centre's one-third weight works as an effective veto. States must also absorb their share of revenue lost to rate cuts they cannot reverse on their own.

Challenges posed by the end of compensation

• Loss of a guaranteed cushion: the Act promised States compensation for five years for revenue lost in moving to GST [1]. That guarantee has lapsed.
• Cess wound down: under GST 2.0 the compensation cess was removed from goods such as coal, whose GST rate was raised from 5% to 18% [4].
• Lower rates, same spending needs: States still fund health, education and welfare. Revenue neutrality should be tested against benchmarks such as the Subramanian Committee's Revenue Neutral Rate of 15–15.5% [5].
• Few independent levers: a State facing a shortfall cannot raise its own GST rate. Only the Council can.
• Uneven and volatile receipts: festive-season spikes can hide weaker underlying trends, and producing States with narrow tax bases are hit hardest.

Overall, the GST Council has turned fiscal federalism from separate taxing powers into shared decisions, but compensation underwrote that trust. The Council should create a rule-based framework for revenue protection, publish revenue-impact assessments and give States more say in setting rates. This would protect the cooperative federalism that Article 279A was meant to build.