The “One Nation One Tax” regime refers to the Goods and Services Tax (GST) implemented in India, which is a significant reform in the country’s tax system. This system was designed to create a unified indirect tax structure across the country, replacing multiple state and central taxes with a single GST. The financial aspects of Centre-State relations in the context of GST can be understood through several key points:

1. Revenue Sharing and Distribution

Revenue Pooling: GST is divided into three main components: Central GST (CGST), State GST (SGST), and Integrated GST (IGST).

• CGST is collected by the Central Government.
• SGST is collected by the State Governments.
• IGST is levied on inter-state transactions and is collected by the Central Government but is distributed between the Centre and the states based on a formula.

Revenue Sharing Mechanism: The revenue collected from IGST is shared between the Centre and the states. This sharing arrangement is crucial in ensuring that states do not suffer revenue losses due to inter-state transactions and that there is financial equilibrium among states.

2. Compensation for Revenue Losses

GST Compensation Cess: To address concerns about potential revenue losses for states due to the transition to GST, the GST Compensation Cess was introduced. This cess was meant to compensate states for any loss of revenue arising from the implementation of GST for a specified period (initially five years, extendable if necessary).

Compensation Mechanism: The Central Government was responsible for compensating the states through the cess collected on certain luxury and sin goods. This mechanism ensures that states have a stable revenue stream, thereby maintaining fiscal stability.

3. Impact on State Finances

Revenue Neutrality: The idea behind GST was to create a neutral tax system where the overall tax burden on goods and services is neither increased nor decreased significantly. However, the actual impact on state finances varied, with some states experiencing revenue growth and others facing shortfalls, especially those with lower-than-average revenue from indirect taxes prior to GST.

Dependence on Central Government: States became more dependent on the central government for their share of IGST revenue and compensation payments. This shift has implications for fiscal federalism and the balance of power between the Centre and states.

4. Economic and Fiscal Integration

Streamlining Taxation: The “One Nation One Tax” regime aimed to simplify the tax structure, reduce cascading effects of taxation, and create a more integrated national market. This integration has economic benefits, including improved efficiency and lower compliance costs for businesses.

Fiscal Integration: The GST system promotes fiscal integration by harmonizing tax rates and regulations across states. This integration helps in reducing economic distortions caused by different state-level tax policies and facilitates a smoother flow of goods and services across state borders.

5. Challenges and Adjustments

Revenue Fluctuations: States faced challenges with fluctuating GST revenue, impacted by changes in economic conditions and compliance rates. Some states experienced shortfalls, which affected their budgetary planning and expenditures.

Compensation Cess Collection: The effectiveness of the compensation mechanism has been a topic of debate, with concerns about the adequacy and timeliness of compensation payments. Disputes over the compensation amounts and delays in payments have sometimes strained Centre-State relations.

In summary, the “One Nation One Tax” regime through GST represents a significant shift in the financial relationship between the Centre and the States in India. While it aims to streamline taxation and enhance economic integration, it also requires careful management of revenue sharing, compensation mechanisms, and fiscal impacts to ensure a balanced and effective federal financial system.