Finance Commission and GST Council: Sharing Money, Sharing Power

Two institutions sit at the heart of how money moves between the Centre and the states: the Finance Commission and the GST Council. They work differently, and that difference tells you a lot about Indian federalism. The Finance Commission is a temporary, expert body; the GST Council is a permanent, political forum. One recommends how a shared pool of taxes should be divided; the other decides, jointly, how a major shared tax should work.

Under Article 280, the President constitutes a Finance Commission every five years, consisting of a chairperson and four other members. Its core job is to recommend how the net proceeds of taxes that are to be shared should be divided between the Union and the states, and then among the states themselves — the vertical and horizontal shares — as well as the principles for grants-in-aid to states. Its recommendations are advisory, not binding, but governments have generally accepted the broad devolution formula it proposes, and its report is laid before Parliament. Because states differ hugely in population, income and needs, the formula always involves judgement: should a state get more because it has more people, because it is poorer, or because it has controlled population growth or raised its own revenue well? Different answers favour different states, which is why each Commission's terms of reference are watched so closely.

The GST Council, created by the 101st Constitutional Amendment of 2016 under Article 279A, works by shared decision-making. It is chaired by the Union Finance Minister and includes the minister in charge of finance or taxation, or another minister nominated by the government, of every state. Decisions require at least three-fourths of weighted votes, with the Centre holding one-third of the weight and all states together holding two-thirds — so neither side can decide alone, but the Centre cannot be outvoted by a small group of states either. The Council recommends rates, exemptions and other GST matters. Supporters present it as cooperative federalism in action; critics note that states gave up much of their independent indirect-tax power when GST was introduced, and argue about whether compensation and rate decisions have fairly reflected that bargain.