India’s Constitution establishes a quasi-federal system with a strong unitary bias. Fiscal federalism — the distribution of financial powers between the Centre and States — lies at the heart of this arrangement. Institutions like the Finance Commission (Article 280) and the GST Council (Article 279A) were created to ensure cooperative fiscal relations. However, tensions have grown over fiscal autonomy, revenue distribution, and institutional imbalances.

Challenges to India’s Federal Structure

1. Vertical Fiscal Imbalance: The Centre controls major revenue sources (income tax, excise, corporate tax), while States bear higher expenditure responsibilities (health, education, welfare). This creates dependence on central transfers.
2. Declining Fiscal Autonomy of States: The introduction of GST (2017) subsumed many State-level taxes, limiting States’ flexibility to raise independent revenues.
3. Delay in GST Compensation: The non-payment or delay of GST compensation (especially during COVID-19) has strained Centre–State trust, with several States citing erosion of fiscal space.
4. Cess and Surcharge Issues: Rising use of cesses and surcharges (not shareable with States) has reduced the divisible pool, weakening States’ fiscal position.
5. Political Centralisation: States ruled by opposition parties often allege bias in the release of central grants and disaster relief funds, undermining cooperative federalism.

Role of Key Institutions

• Finance Commission:

1. 1. 1. Recommends vertical and horizontal devolution of taxes.
      2. The 15th Finance Commission (2021–26) increased States’ share to 41% but also introduced performance-linked grants, which some States viewed as restrictive.
      3. Promotes fiscal discipline but must balance autonomy and equity.

• GST Council:

1. 1. Embodies cooperative federalism through consensus-based decision-making.
   2. However, Centre’s one-third voting share and dominance in administrative control raise concerns about parity.
   3. Recent disputes (e.g., on compensation cess, taxation of online gaming) reveal friction in consensus-building.

While institutions like the Finance Commission and GST Council are vital for fiscal cooperation, India’s federal balance remains fragile. Strengthening transparency in transfers, ensuring timely compensation, and empowering States with greater fiscal autonomy are essential to realize the vision of true cooperative federalism, where both levels of government function as equal partners in development.