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UPSC MainsGeneral Studies Paper IIndian PolityPractice question

101st Constitutional Amendment and Fiscal Federalism

Resource collection and redistribution remains a keystone in a federal structure. How does the enactment of the 101st Constitutional Amendment Act strengthen federalism?

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How to approach

Introduce by highlighting the significance of resource collection and redistribution in fiscal federalism, linking it to the 101st Constitutional Amendment Act. In the body, analyze structural empowerment, institutionalization of cooperative decision-making, and trust-building mechanisms under the GST framework. Conclude by assessing how the amendment anchors collaborative federalism while preserving essential state autonomy.

Model answer

315 words

Introduction

Resource mobilization and equitable redistribution form the bedrock of fiscal federalism in any multi-tiered governance structure. The 101st Constitutional Amendment Act, 2016, which introduced the Goods and Services Tax (GST), fundamentally reshaped this architecture by establishing a framework of 'pooled sovereignty' between the Union and the States.

Structural Empowerment and Resource Sharing

  • Simultaneous Legislative Competence (Article 246A): The amendment dismantled the rigid separation of taxation powers under the Seventh Schedule by granting co-equal, simultaneous powers to Parliament and State Legislatures to levy GST, establishing constitutional parity.
  • Equitable Inter-State Taxation (Article 269A): By mandating the levy and collection of Integrated GST (IGST) on inter-state trade by the Union and apportioning it between the Union and the States, it established a destination-based consumption tax that safeguards the revenue base of consuming states.

Institutionalizing Cooperative and Uncoerced Federalism

  • The GST Council (Article 279A): It created a constitutional body for consensus-building where States collectively hold a two-thirds voting weight and the Union holds one-third, ensuring that neither entity can make unilateral fiscal determinations.
  • Judicial Reinforcement of Federal Autonomy: In Union of India v. Mohit Minerals (2022), the Supreme Court clarified that GST Council recommendations have persuasive value rather than unqualified binding force, emphasizing that Indian federalism relies on dialogue and consensus rather than central coercion.

Federal Trust-Building Mechanisms

  • Revenue Guarantee: Under the GST (Compensation to States) Act, 2017, the Union guaranteed a 14% compounded annual revenue growth rate for the initial five-year transition period.
  • Fiscal Shield: The extension of the GST compensation cess levy up to March 2026 to service pandemic-era market borrowings has provided vital support to state welfare budgets and maintained intergovernmental fiscal confidence.

Conclusion

While states continue to derive exclusive autonomy from specific non-GST levies like excise on potable alcohol and stamp duties, the 101st Constitutional Amendment Act successfully transitioned India from fragmented taxation to collaborative fiscal federalism, functioning as an institutional anchor for cooperative governance.

Key facts to remember

definition
Pooled Sovereignty

A federal arrangement where the Union and subnational units voluntarily surrender absolute independent authority in specific spheres to make binding decisions collectively through shared institutions like the GST Council.

case study
Union of India v. Mohit Minerals (2022)

The Supreme Court ruled that recommendations of the GST Council are not binding on Parliament and State Legislatures, reaffirming simultaneous legislative powers under Article 246A and preventing unconstitutional executive centralisation.

scheme
GST (Compensation to States) Act, 2017

Legislated to provide financial compensation to states for any revenue loss arising from the implementation of GST, initially assuring a 14% annual revenue growth trajectory for five years.

Frequently asked questions

Are recommendations of the GST Council legally binding on States?

No. The Supreme Court in the Mohit Minerals ruling held that GST Council decisions have high persuasive value but do not strip Parliament or State Assemblies of their concurrent legislative power under Article 246A.

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