The GST Council, Grants and State Borrowing

279A(5): the Council shall recommend the date on which the tax is to be levied on petroleum crude, high speed diesel, petrol, natural gas and aviation turbine fuel. These five are constitutionally within the goods and services tax and stand outside it until the Council names a day. That is why petrol and diesel still carry Union excise and State value added tax, and it is a political question, not a legal one: the two governments between them draw a very large revenue from those five commodities.

279A(6): the Council shall be guided by the need for a harmonised structure of the tax and for the development of a harmonised national market for goods and services.

279A(7): one half of the total number of members is the quorum.

279A(8): the Council determines its own procedure.

279A(11): the Council shall establish a mechanism to adjudicate any dispute between the Government of India and one or more States, between the Union with some States on one side and other States on the other, or between two or more States, arising out of its recommendations or their implementation.

The voting rule, and the arithmetic nobody works out

Article 279A(9). Every decision shall be taken at a meeting by a majority of not less than three fourths of the weighted votes of the members present and voting, in accordance with these principles:

• (a) the vote of the Central Government has a weightage of one third of the total votes cast;
• (b) the votes of all the State Governments taken together have a weightage of two thirds.

Work out what those three numbers actually do, because this is the whole design.

Write the total weight as 100. The Union holds 33.33. The States share 66.67 equally among those present and voting. A decision needs 75.

What follows. Neither side can act alone and each can stop the other. The Union has a permanent veto; so does any group of more than three eighths of the States. The rule was designed to force agreement, not to let one side win, and in practice the Council has decided almost everything by consensus without a formal vote.

Are the Council's recommendations binding

No. Article 279A(4) says the Council shall make recommendations, and article 246A confers the power to legislate on Parliament and the State Legislatures. The Council recommends; the legislatures legislate.

Facts. Union of India v. Mohit Minerals Pvt Ltd, Civil Appeal No. 1390 of 2022, decided on 19 May 2022, arose out of two notifications of 28 June 2017. An importer buying goods on cost, insurance and freight terms pays the foreign seller a price that already includes the ocean freight, and pays integrated goods and services tax on the imported goods on a value that includes that freight. Notification 8/2017 levied integrated tax at 5 per cent on the supply of the service of transporting those goods by vessel from a place outside India, and Notification 10/2017 made the importer the recipient liable to pay it on reverse charge, although the importer was party to neither the contract of carriage nor its payment. Mohit Minerals challenged both. The High Court struck them down and the Union appealed.

Held. The Supreme Court, in a judgment of a Bench of Chandrachud, Surya Kant and Vikram Nath JJ, dismissed the appeal and held two things a student of fiscal federalism needs.

First, on the Council. "The recommendations of the GST Council are not binding on the Union and States." The Court gave the reasons: the Constitution (One Hundred and First Amendment) Act 2016 deleted the proposed article 279B, which would have created a separate dispute settlement authority, indicating that the recommendations were intended to have only persuasive value; article 279A does not begin with a non obstante clause, and article 246A is not made subject to it; Parliament and the State Legislatures hold a simultaneous power to legislate on the tax and article 246A contains no repugnancy provision to resolve a conflict between them. The recommendations are "the product of a collaborative dialogue involving the Union and States" and are recommendatory; to treat them as binding edicts "would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST". The Court added the important qualification that when the Government exercises its rule making power under the Central and Integrated Goods and Services Tax Acts, it is bound by the Council's recommendations, because those statutes say so.

Second, on the levy. A tax on the supply of a service which the legislation has already included in a tax on the composite supply of goods cannot stand, so the levy on ocean freight in a cost, insurance and freight contract failed.

Why this matters beyond tax law. The Council is not a super legislature and the States did not surrender their taxing power to it in 2016; they exchanged separate powers for a shared one exercised through a forum in which neither side can be outvoted. The Court's phrase for Indian federalism is worth remembering: "a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation".

Grants under article 282, and the centrally sponsored schemes

The text. "The Union or a State may make any grants for any public purpose, notwithstanding that the purpose is not one with respect to which Parliament or the Legislature of the State, as the case may be, may make laws."

Read the "notwithstanding" clause slowly, because everything turns on it. Health, agriculture, police, water supply and sanitation are State subjects; the Union may not legislate on them. But it may spend on them, and article 282 says so in terms. That single sentence is the constitutional basis of the centrally sponsored schemes, and it is why the Union can design a national scheme in a field where it has no power to make a law.

How much money. Centrally sponsored schemes are estimated at 5,48,798 crore rupees for 2026-27. The Sixteenth Finance Commission records that they account for more than 50 per cent of total transfers from the Union to the States, that more than 80 schemes are currently in operation, that they are run by more than 20 departments and ministries, and that spending on them is about 1.5 per cent of gross domestic product every year.

The States' complaint, which is the substance of topic 3.7 and not a digression:

1. Design. A scheme in a State subject is designed in Delhi, so uniform conditions are applied to States whose problems differ.
2. Matching contribution. Most schemes require the State to contribute a share, so a Union decision pre empts a part of the State's own budget and reduces the money left for the State's own priorities.
3. Conditionality. The money comes with conditions, and unlike devolution under article 270 it is not the State's as of right.
4. No Finance Commission scrutiny. Article 282 transfers do not go through the Commission, so the constitutional machinery designed to adjudicate transfers has nothing to do with the largest conditional channel.

The Union's answer is equally real: national priorities such as school education, rural roads, drinking water and health require a minimum standard everywhere, and a poor State may be least able to fund exactly what its people most need.

What the Sixteenth Commission recommended. It found that although the schemes were restructured in 2015-16, their number has grown, and that although a mechanism exists to review their efficacy every five years, this has not resulted in the closure of any scheme, the goalpost being shifted or the scheme renewed when its objectives are reached. It recommended that the Union appoint a high powered committee to reassess the schemes and recommend the closure of those not spending resources productively, observing that continuing schemes with low or negative social returns crowds out better ones. The Government said it would examine the recommendation in due course.

Article 275 distinguished. Grants in aid under article 275 are charged on the Consolidated Fund of India, are made on the Finance Commission's recommended principles, and go to States determined to be in need of assistance, with a proviso for schemes of development for the welfare of Scheduled Tribes and for raising the level of administration of Scheduled Areas. They are estimated at 1,29,397 crore rupees for 2026-27, which is less than a quarter of the centrally sponsored scheme figure. The channel the Constitution designed for grants is much the smaller of the two.

State borrowing under article 293

293(1). A State may borrow within the territory of India upon the security of its Consolidated Fund, within limits fixed by its own Legislature.

Note what is absent: any power to borrow outside India. A State cannot raise an external commercial loan or issue a bond abroad. External assistance reaches a State only through the Union.

293(2). The Union may make loans to a State, or guarantee loans raised by a State, within limits fixed under article 292.

293(3). A State may not raise any loan without the consent of the Government of India if there is still outstanding any part of a loan made to it by the Union, or in respect of which the Union has given a guarantee.

293(4). That consent may be granted subject to conditions.

Every State is indebted to the Union, so article 293(3) is in practice a general requirement of Union consent, and the net borrowing ceiling set under it is the binding constraint on State fiscal policy. It is the reason a State cannot simply decide to spend more and borrow the difference, and it is why the Sixteenth Finance Commission's recommendation that the States' fiscal deficit be capped at 3 per cent of gross state domestic product was expressly framed as something to be "strictly enforced in accordance with clause (3) of Article 293". The Government accepted in principle the quantum of the ceilings.

Off budget borrowing. The Commission also recommended that the States completely discontinue the practice of borrowing outside the budget, through undertakings and special purpose vehicles whose debt the State services, and bring all such borrowing on to their budgets. The reason is exactly that given in [Deficits, Public Debt and the FRBM Act]: a liability kept off the budget does not appear in the deficit, so the ceiling is met on paper and not in fact.

A worked example: four rupees reaching a State, four different legal characters

A student who can put a rupee in the right row has understood Indian fiscal federalism. The four differ in who decides, whether the money is conditional, whether it must be repaid, and whether any independent body has a say.

What beginners get wrong

"The GST Council's decisions are binding." They are recommendations. Union of India v. Mohit Minerals Pvt Ltd holds that they are not binding on the Union and the States, having persuasive value only, though the Government is bound by them when exercising rule making power under the GST statutes.

"The Union can push anything through the Council because it holds one third." One third is 33.33 and the threshold is 75. The Union cannot carry a single decision alone; it can only block.

"The States can outvote the Union." All of them together hold 66.67, which is below 75. They cannot.

"Petrol is outside GST because the Constitution excludes it." Article 279A(5) puts the five petroleum products inside the constitutional scheme and leaves the date to the Council's recommendation. The exclusion is a decision, not a prohibition.

"Centrally sponsored schemes are made under the Finance Commission's recommendations." They flow under article 282, on which the Commission makes no binding recommendation at all.

"A State can borrow abroad if its Legislature permits." Article 293(1) confines State borrowing to within the territory of India, and article 293(3) requires the Union's consent while the State is indebted to it.

"Article 282 is a minor provision." It carries 5,48,798 crore rupees in 2026-27 against 1,29,397 crore under article 275.

Limits

The Council's proceedings are largely by consensus, so the voting arithmetic describes a power that is rarely exercised formally and always present in the background.

The compensation arrangement has ended. The five year guarantee of compensation to the States for revenue loss on the introduction of the tax has run out, and the Sixteenth Commission's projections proceed on that basis.

The scheme by scheme detail of centrally sponsored schemes changes every year, so the number of schemes and the sharing ratios given here belong to the Commission's report and will move.

One case is not a body of law. This book carries one judgment because the constitutional standing of the Council cannot be stated without it, and a student answering an economics paper should state the position and cite the case in a line, not write a case note.

Quick revision

1. Article 246A gives Parliament and the State Legislatures a simultaneous power over the goods and services tax, with no repugnancy clause; article 279A creates the forum in which they agree.
2. Council composition: Union Finance Minister as Chairperson; Union Minister of State for Revenue or Finance; one Minister nominated by each State; Vice Chairperson chosen by the State members. Quorum one half.
3. 279A(4) eight heads of recommendation, including what is subsumed, exemptions, model laws, apportionment under article 269A, the threshold, rates including floor rates with bands, a special calamity rate, and special provision for eleven named States.
4. 279A(5): the Council recommends the date for bringing petroleum crude, high speed diesel, petrol, natural gas and aviation turbine fuel into the tax.
5. 279A(9) voting: three fourths of the weighted votes of members present and voting; Union one third, all States together two thirds. Therefore: the Union cannot pass anything alone, the States cannot pass anything without the Union, the Union can always block, more than three eighths of the States can block, and the smallest winning coalition is the Union plus five eighths of the States.
6. 279A(11): the Council shall establish a dispute adjudication mechanism.
7. Union of India v. Mohit Minerals Pvt Ltd, decided 19 May 2022: the Council's recommendations are not binding; article 279B was deleted; article 279A has no non obstante clause and article 246A is not subject to it; the Government is bound when making rules under the GST Acts. Also: no separate tax on ocean freight in a cost, insurance and freight import, being part of a composite supply already taxed.
8. Article 282: any grant for any public purpose notwithstanding absence of legislative competence. Funds centrally sponsored schemes: 5,48,798 crore in 2026-27, more than 80 schemes, more than 20 ministries, about 1.5 per cent of GDP, more than half of Union transfers to States on the Commission's finding, and no scheme has ever been closed by the five yearly review.
9. Article 275 grants in aid, charged on the Consolidated Fund, on the Finance Commission's principles: 1,29,397 crore.
10. Article 293: borrowing only within India, within the State Legislature's limit, and not without the Union's consent while the State is indebted to it. Ceiling recommended at 3 per cent of GSDP, accepted in principle; off budget borrowing to be brought on to the budget.

Test yourself

1. Discuss the composition, functions and voting procedure of the Goods and Services Tax Council. The Council is constituted by the President under article 279A, inserted by the Constitution (One Hundred and First Amendment) Act 2016. It consists of the Union Finance Minister as Chairperson, the Union Minister of State in charge of Revenue or Finance, and the Minister in charge of Finance or Taxation, or any other Minister nominated, by each State Government, the State members choosing one among themselves as Vice Chairperson. Under article 279A(4) it recommends to the Union and the States the taxes, cesses and surcharges to be subsumed in the goods and services tax; the goods and services to be subjected to or exempted from it; model laws, principles of levy, the apportionment of the tax on inter State supply under article 269A and the principles governing the place of supply; the threshold of turnover for exemption; the rates including floor rates with bands; any special rate for a specified period to raise resources during a natural calamity; special provision for eleven named States; and any other matter it decides.

Under article 279A(5) it recommends the date on which the tax is to be levied on petroleum crude, high speed diesel, petrol, natural gas and aviation turbine fuel. It is guided by article 279A(6) to secure a harmonised structure and a harmonised national market, one half of its members form the quorum under clause (7), and it determines its own procedure under clause (8). Under clause (9) every decision requires a majority of not less than three fourths of the weighted votes of members present and voting, the Central Government's vote carrying a weightage of one third and the votes of all the States together two thirds, and under clause (11) the Council is required to establish a mechanism to adjudicate disputes arising out of its recommendations or their implementation.

2. Work out what the voting rule in article 279A(9) actually permits. Take the total weight as 100. The Union holds 33.33 and the States share 66.67 equally among those present and voting, and a decision needs 75. The Union alone commands 33.33 and cannot therefore carry any decision. All the States together command 66.67 and cannot carry one either, so they cannot act without the Union. The Union can, however, always block, because if it opposes a proposal the maximum weight available in support is 66.67, which falls short of 75. A group of States blocks when its weight exceeds 25, which happens when it is more than three eighths of the States present and voting. And the smallest coalition that can carry a decision is the Union together with enough States to supply the remaining 41.67 out of the States' 66.67, which is five eighths of them. The design therefore requires agreement rather than permitting victory: neither side can legislate the tax through the Council alone, and each holds a veto. In practice the Council has proceeded almost entirely by consensus, so the arithmetic describes a power held in reserve.

3. Are the recommendations of the GST Council binding? Discuss with reference to decided authority. They are not. Article 279A(4) provides that the Council shall make recommendations, while article 246A confers the power to legislate on Parliament and the State Legislatures, so the Council recommends and the legislatures legislate. The question was settled in Union of India v. Mohit Minerals Pvt Ltd, decided on 19 May 2022, where the Supreme Court held that the recommendations of the Council are not binding on the Union and the States. It gave three reasons. The Constitution (One Hundred and First Amendment) Act 2016 dropped the proposed article 279B, which would have set up a separate dispute settlement authority, indicating that the recommendations were meant to carry persuasive value only. Article 279A does not open with a non obstante clause, and article 246A is not expressed to be subject to it.

And Parliament and the State Legislatures hold a simultaneous power over the tax with no repugnancy provision in article 246A to resolve a conflict, so treating the Council's recommendations as binding edicts would disrupt fiscal federalism, in which both are conferred equal power. The Court qualified this in one respect that a careless answer omits: where the Government exercises rule making power under the Central and Integrated Goods and Services Tax Acts, it is bound by the Council's recommendations, because those statutes so provide. On the merits the Court also held that a separate levy on ocean freight in a cost, insurance and freight import could not stand, the freight having already been included in the value of the composite supply of goods on which integrated tax was paid.

4. Explain article 282 and the controversy about centrally sponsored schemes. Article 282 provides that the Union or a State may make any grants for any public purpose, notwithstanding that the purpose is not one with respect to which Parliament or the State Legislature may make laws. Its importance lies in the notwithstanding clause: health, agriculture, police, water supply and sanitation are State subjects on which the Union cannot legislate, but it may spend on them, and that is the constitutional foundation of the centrally sponsored schemes. The scale is large. They are estimated at 5,48,798 crore rupees for 2026-27, and the Sixteenth Finance Commission records that they account for more than half of total transfers from the Union to the States, that more than eighty schemes are in operation run by more than twenty departments and ministries, and that spending on them is about 1.5 per cent of gross domestic product a year.

The States object on four grounds: the schemes are designed centrally although they operate in State subjects, so uniform conditions are applied to unlike problems; most require a matching contribution, so a Union decision pre empts part of a State's own budget; the money is conditional and, unlike devolution under article 270, is not the State's as of right; and article 282 transfers escape the Finance Commission altogether, so the constitutional body designed to adjudicate transfers has no say over the largest conditional channel. The Union answers that national priorities require minimum standards everywhere and that the poorest State is often least able to fund what its people most need. The Sixteenth Commission found that although a five yearly review mechanism exists it has never resulted in the closure of a scheme, the goalpost being shifted or the scheme renewed, and it recommended a high powered committee to reassess the schemes and close those that are not spending productively.

5. What restrictions apply to State borrowing, and why does article 293(3) matter so much? Article 293(1) permits a State to borrow within the territory of India upon the security of its Consolidated Fund within limits fixed by its own Legislature, which by its silence excludes borrowing outside India altogether, so no State may raise an external commercial loan or issue a bond abroad and external assistance reaches it only through the Union. Article 293(2) permits the Union to lend to a State or guarantee its loans within the limits fixed under article 292. Article 293(3) provides that a State may not raise any loan without the consent of the Government of India while any part of a loan made to it by the Union remains outstanding, or while a Union guarantee subsists, and article 293(4) permits that consent to be given subject to conditions.

Since every State is indebted to the Union, clause (3) operates as a general requirement of Union consent, and the net borrowing ceiling set under it, rather than any State's own fiscal responsibility legislation, is the operative constraint on State fiscal policy. Its importance was illustrated by the Sixteenth Finance Commission, which recommended that the States' fiscal deficit be capped at 3 per cent of gross state domestic product and framed the recommendation as something to be strictly enforced in accordance with clause (3) of article 293; the Government accepted the quantum of the ceilings in principle. The Commission also recommended that States discontinue off budget borrowing entirely and bring it on to their budgets, since a liability kept outside the budget does not appear in the deficit and allows a ceiling to be met on paper and not in fact.

6. Compare the four channels by which money reaches a State. They differ in who decides, whether the money is conditional, whether it must be repaid, and whether any independent body scrutinises it. Devolution under article 270 is the strongest form: the States' share of the net proceeds does not form part of the Consolidated Fund of India at all, it is unconditional, and the percentage is prescribed by the President on the recommendation of a constitutional body, the Finance Commission, so a State can budget on it as of right. Grants in aid under article 275 are charged on the Consolidated Fund of India and are made to States determined to be in need of assistance on principles recommended by the same Commission; they are estimated at 1,29,397 crore rupees for 2026-27.

Grants under article 282 are wholly discretionary, may be made for any public purpose even outside the Union's legislative competence, are usually conditional and carry a matching requirement, and pass no independent scrutiny; they carry 5,48,798 crore rupees in the same year, more than four times the article 275 figure. Borrowing under article 293 is not a transfer at all but a loan that must be serviced and repaid, and it is available only within India, only within the ceiling fixed by the State Legislature, and only with the consent of the Government of India while the State remains indebted to it. The pattern is worth stating plainly: the channel with the least Union discretion is the largest, but the channel with the most Union discretion has grown far beyond the constitutional grant provision designed for the purpose.