Fiscal Federalism Issues in GST Compensation to Bihar Post-2026
Analyzing the fiscal challenges for Bihar after GST compensation ends in 2026 and its implications for India's federal structure
Fiscal Federalism Challenges in GST Compensation to Bihar Post-2026
Core Concern: The discontinuation of GST compensation after June 2026 threatens Bihar’s fiscal stability. Recent GST Council decisions (December 2024) have deferred structural reforms to June 2025, leaving the state’s 70% pre-GST revenue gap unresolved as the 2026 deadline approaches.
Latest Developments (as of December 2024)
55th GST Council Meeting (21 December 2024)
- Compensation cess reduced to 0.1% for supplies to merchant exporters
- Ground clearance cess applicability confirmed effective 26 July 2023
- Group of Ministers (GoM) on GST compensation restructuring extended till 30 June 2025
54th GST Council Meeting (9 September 2024)
- Compensation cess extended till March 2026 for luxury/demerit goods
- ₹8.67 lakh crore: Total cess collection (actual + projected) till March 2025
- ₹9.85 lakh crore: Total liability (compensation paid + back-to-back loans + interest)
- Centre committed to repay ₹2.69 lakh crore back-to-back loans by January 2026
Bihar’s Structural Vulnerabilities
Revenue Dependency Crisis
- SGST collections (₹48,000 cr in 2023–24) cover only ~40% of revenue expenditure
- Pre-GST revenue deficit: ~70% of total requirement
Projected Fiscal Shock
- Immediate annual shortfall: ₹15,000–20,000 crore post-2026
- Tax buoyancy remains below 1.0 (sub-par growth responsiveness)
Limited Fiscal Autonomy
- Per-capita income (₹54,000 vs. national ₹1.49 lakh) restricts alternative taxation
- Inability to leverage “compensatable taxes” like fuel/alcohol
Federalism Fault Lines
| Challenge | Impact on Bihar | Systemic Risk |
|---|---|---|
| Trust Deficit | GoM extension delays structural solution | Erodes cooperative federalism foundation |
| Asymmetric Burden | Manufacturing states gain; consumption states lose | Widens inter-state inequality |
| Debt Overhang Risk | Centre’s ₹2.69L cr loan repayment pressures state transfers | Compensation uncertainty for states |
Compensation Mechanisms: Options & Obstacles
| Solution | Pros | Cons |
|---|---|---|
| Permanent Compensation Fund | Stable revenue for vulnerable states | GoM report pending (deadline June 2025) |
| Enhanced IGST Share | 100% IGST allocation to deficit states | Requires constitutional amendment |
| FC-XV Intervention | Explicit GST shortfall weighting in devolution | 2026 reporting deadline pressure |
Bihar-Specific Fiscal Risks
- Human Capital Collapse
Threat to health (4.7% of budget) and education spending (15.2%) - Debt Spiral
Debt-to-GSDP ratio (37.2% in 2024) could breach 40% threshold - Political Fallout
Renewed demands for special category status amid fiscal uncertainty
The Way Forward
Timebound GoM Resolution
- Clear framework by June 2025 with veto power for deficit states
- Tobacco cess optimization (Bihar’s key revenue source)
FC-XV Preparatory Action
- Formal inclusion of GST shortfalls in devolution formula
Bihar’s Revenue Mobilization
- Digital compliance expansion for tobacco products
- Industrial diversification beyond agriculture
Conclusion: The 55th Council’s GoM extension compounds Bihar’s ₹20,000cr fiscal cliff risk. Centre must deliver a federalism-compatible solution by June 2025 to prevent constitutional strain. Failure would violate GST’s original “pooled sovereignty” principle and trigger fiscal emergency in high-deficit states.