Taxation and Federalism

  • IASbaba
  • November 12, 2021
  • 0
UPSC Articles
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  • GS-3: Government Budgeting.
  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation 

Taxation and Federalism

Context: Union Government reduced excise duty on petrol and diesel on the eve of Deepavali. While the reduction for petrol was ₹5, duty on diesel came down by ₹10.

Issues with Centre levying cess on Petrol & Diesel

  • The Centre has been levying around ₹31 and ₹33 as additional cess on petrol and diesel, respectively, till the beginning of November. 
  • The Constitution does permit the Centre to levy cess and surcharges beyond the basic taxes and duties in extraordinary situations. But making it manifold higher than the basic taxes is nothing but a misuse of such provisions of the Constitution. 
  • These additional taxes do not go to a divisible pool and such a high burden of taxes is an attack on the people and the federal rights of States.

Revenue Data 

  • The basic excise duty is ₹1.40 and the rest of the tax is made up of special additional excise duty and cess which would not go to divisible pool and to the States.
  • The Union government has collected around ₹3.72-lakh crore in 2020-21 as revenue from petroleum products as per the data published by the Petroleum Planning and Analysis Cell.
  • Of this, only around ₹18,000 crore is collected as Basic Excise Duty which is around 4.8% of the total revenue from petroleum products. The divisible pool is only 41% of this ₹18,000 crore
  • Around ₹2.3-lakh crore is collected as cess and the rest ₹1.2-lakh crore is collected as special additional excise duty. 
  • 95% of the total revenue from petroleum, which are not to be shared with the States at all. This is a classic example of undermining federalism prevailing in the country.

Impact on Federalism

  • After the implementation of Goods and Services Tax (GST), States have the right to decide the taxes on just three goods — petrol, diesel and liquor.
  • By unilaterally taking away the bulk of the tax revenues on petrol and diesel, the Centre has done injustice to the States. This is obtuse use of fiscal federalism. All States must oppose this in a united manner.
  • The promise was that the revenue neutral rate (RNR) will be implemented, which means States would get revenues similar to what they were getting before the implementation of GST. 
  • The average taxes on goods was 16% during the initial GST period. The average rate of taxes in goods at present is 11.3%. The consumer, however, hasn’t benefited from it instead inflation has also been rising. 
  • On an average, the country collects ₹1-lakh crore a month as GST — ₹12-lakh crore in a year; ₹6-lakh crore each for the States and the Centre. Had RNR been maintained, the total amount would have been ₹18-lakh crore at the rate of 16%. States would have received at least ₹3-lakh crore additionally.
  • A detailed analysis must be done on why States are losing revenue. GST has to be streamlined to ensure RNR, but without hurting the common people.


There has to be detailed deliberations by states & centre to help address the emerging issues within fiscal federalism.

Connecting the dots:

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