GST Council: How Federalism Works in India’s Tax System

Our earlier article covered GST’s 2017 rollout as India’s biggest indirect-tax reform. This article looks specifically at the GST Council, the constitutional body where the Centre and every state jointly decide tax rates, and at the federalism disputes that body’s voting structure has repeatedly produced.

How the Council Is Structured

Established under Article 279A of the Constitution alongside GST’s 2016-2017 rollout, the GST Council is chaired by the Union Finance Minister and includes the finance minister of every state as a member, according to Civilsdaily’s explainer on the Council’s voting mechanics, making it the joint decision-making body responsible for setting GST rates, exemptions, and administrative rules across the entire country rather than leaving individual states free to set their own separate indirect tax rates as they largely could before GST’s introduction.

The Voting Structure That Gives the Centre an Effective Veto

The Council’s voting rules are specifically designed to require broad consensus: the Union government holds one-third of the total votes, while all states collectively hold the remaining two-thirds, and any decision requires a three-fourths majority to pass, according to Tax2win’s breakdown of the mechanism. Because reaching three-fourths requires the Centre’s own one-third bloc to be part of the winning majority, the Centre effectively holds a veto over any Council decision it opposes, even though it cannot single-handedly force through a decision the states collectively oppose either, a carefully balanced structure that requires genuine Centre-state cooperation rather than allowing either side to unilaterally dictate outcomes.

If you like this, you must read: GST Launch: How Modi's 'One Nation One Tax' Reform Was Rolled Out

The 2020-2022 Compensation Cess Dispute

One of the most significant federalism tests the Council structure has faced involved the compensation guarantee built into GST’s original 2017 design, under which the Centre promised states a 14 percent annual growth guarantee in GST revenue for five years, with any shortfall covered through a dedicated compensation cess. When collections fell well short of that guarantee during 2020-2022, a shortfall worsened considerably by the pandemic’s economic disruption, the Centre initially resisted directly borrowing to cover the gap on its own account, instead arranging a special back-to-back borrowing window, roughly Rs 1.1 lakh crore in FY21 alone and further extended in FY22, that states could individually access, a compromise reached only after considerable friction at Council meetings before the compensation regime formally ended in June 2022, even as the underlying cess continued afterward specifically to service the loan repayments from that borrowing arrangement.

The 2025 “GST 2.0” Rate Simplification and Renewed Friction

More recent Council decisions have reignited similar Centre-state tension. The Council’s 56th meeting, held over September 3-4, 2025, approved what has been described as “GST 2.0,” a simplified move to a dual-slab structure of 5 and 18 percent, according to coverage by The Federal. This rate simplification prompted renewed demands from several opposition-ruled states, with Kerala’s finance minister publicly warning of fiscal “consequences” and pushing for revenue-loss compensation, according to Deccan Herald’s coverage, while Tamil Nadu took a more cautiously critical stance and even Andhra Pradesh, governed by an NDA-aligned party, sought its own revenue protection guarantees, according to South First’s reporting, illustrating that friction over GST’s federal fiscal arrangement isn’t confined strictly along opposition-versus-ruling-party lines.

Also read: Inter-State Council: India's Formal but Underused Forum for Centre-State Dialogue

The “One Nation One Tax” Federalism Critique

Beyond these specific disputes, a broader federalism critique of GST’s underlying design has persisted since its 2017 introduction: critics argue the “One Nation One Tax” framework, whatever its genuine benefits in simplifying India’s previously fragmented indirect tax system, structurally reduced individual states’ autonomous power to set their own tax rates on goods and services, a taxation authority states previously held independently, leaving them instead dependent on reaching Council consensus and, in periods of revenue shortfall, on Centre-administered compensation mechanisms that have themselves become recurring flashpoints, as the 2020-2022 and 2025 episodes both illustrate.

The Government and Supporters’ Defence

Supporters of the GST Council structure, reflecting the government’s consistent position, argue the three-fourths voting threshold’s requirement for broad consensus is itself evidence of genuine cooperative federalism in action, since no single state or even the Centre alone can unilaterally impose tax decisions on the others, and point to the Council’s continued functioning through multiple difficult rounds of negotiation, including the compensation cess dispute and the 2025 rate simplification, as proof the mechanism can absorb and resolve genuine Centre-state disagreement rather than breaking down entirely under fiscal pressure.

Bottom Line

The GST Council’s voting structure, giving the Centre one-third of votes and states two-thirds but requiring a three-fourths majority for any decision, was designed to force genuine Centre-state consensus, and has broadly held together through significant tests including the 2020-2022 compensation cess shortfall and the 2025 GST 2.0 rate simplification, even as both episodes produced real friction with opposition-ruled states and fed a persistent broader critique that GST’s “One Nation One Tax” design left states with less autonomous taxation power than they held before 2017.

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Abhyudaya Verma