New Delhi, Sept. 10 -- In 2017, Indian states did something unprecedented in the history of fiscal federalism globally: they surrendered their most productive taxes-value added tax, entry tax, octroi and others-to a collective body in exchange for the idea of 'one nation, one tax.'

The price of that surrender was written into the Goods and Services Tax (Compensation to States) Act of 2017; it protected state revenue at 14% compound annual growth for five years, funded by a GST cess on sin and luxury goods.

The promise was politically elegant. The arithmetic less so. Cess collections fell behind the guarantee even before the pandemic and covid widened the gap dramatically. The Centre eventually borrowed Rs.2.69 trillion across two fiscal...