1. The SGST-share idea is real, but it solves a different problem

A state minister has formally proposed to the GST Council changing the current 50:50 CGST:SGST split to something closer to SGST 70–80% / CGST 20–30%. That’s a genuine, on-record position, not a hypothetical. But raising the SGST share doesn’t touch the mechanism behind the devolution gap at all. SGST and CGST split a single state’s own GST collection at the point of sale — they have nothing to do with the Finance Commission’s separate, much larger pool of Union taxes (income tax, corporation tax, customs, Union excise, plus CGST) that gets redistributed nationally under Article 280, weighted toward population and income-distance rather than where the money was actually collected.

Raising the SGST share would help every state in proportion to its own GST base — which means it would help Maharashtra, Karnataka, Gujarat and Tamil Nadu (the states already collecting the most GST) the most in absolute terms, while doing comparatively little for Uttar Pradesh or Bihar, whose own GST base is smaller relative to their population. That’s very likely to widen the donor-state grievance rather than close it, unless it’s paired with a separate reform to the devolution formula itself. What states with a genuine devolution grievance are actually asking for, per the public record, is different and more specific:

• Raise the vertical devolution share from 41% to 50% — Karnataka’s specific, on-record ask, via its Chief Minister’s economic advisor.
• Bring cesses and surcharges into the shareable pool. This is the sharpest part of the public debate: the official devolution rate is 41%, but the effective share states actually receive is closer to 29–30%, because cesses and surcharges — which fall outside Article 270's divisible pool by constitutional design — have grown as a share of central revenue. That’s a real, structural leak that happens without ever touching the headline 41% figure.
• Reform the horizontal formula’s weights — Karnataka has specifically proposed using GSDP contribution as an indicator, under which its own horizontal share would rise from roughly 3.64% to 5.24%.

All three of these require either a constitutional-level political negotiation (raising 41% needs Union Cabinet and Finance Commission buy-in) or a future Finance Commission choosing to change its own formula — both multi-year, nationally-contested processes. That’s the context for why a state-level, state-controllable lever matters: it doesn’t require winning that fight first.

2. Ethanol SGST: a real example of a lever states already have — currently working backwards

This blog’s earlier piece on ethanol SGST and CNG VAT quantified exactly this kind of state-controllable, non-devolution lever — and found that, as currently structured, it’s actively costing states money rather than earning it. The mechanism: petrol and diesel sit entirely outside GST, taxed instead under each state’s own VAT/excise law at rates of 13–35%. Ethanol, blended into that petrol at 10–30% by volume under India’s ethanol-blending programme, is inside GST, taxed at a flat 5%. Every litre of ethanol blended into the fuel supply shifts revenue out of a state’s high-rate VAT base and into a low, nationally-fixed GST rate — a straight state-revenue loss that scales with the blending ratio, quantified in that piece at roughly ₹17,865 crore at E20 and ₹26,792 crore at E30, nationally.

Two structural fixes were laid out there, and both are genuinely state-lever fixes, not devolution-formula fixes: reclassifying the retail sale of blended fuel entirely under state VAT (closing the gap completely, but requiring a GST Council supermajority), or a state ethanol-compensation cess funded from the OMC-side margin gain that blending itself creates (a smaller, faster, partial fix — closing roughly 40% of the gap at E20 on the numbers in that piece).

3. The overlap that makes this relevant to the devolution debate specifically

Here’s the part that connects the two pieces — though it’s a looser link than a single clean threshold, not a one-exception rule. Five of the six states in the table below are net devolution “donors,” and three of them — Telangana, Karnataka and Maharashtra — are also the three most exposed to the ethanol-SGST shortfall, carrying the highest petrol VAT rates. But donor status doesn’t track the petrol VAT rate cleanly beyond those three: Gujarat and Tamil Nadu are donors despite having the two lowest VAT rates in the table, and Uttar Pradesh — the sole receiver — actually taxes petrol more heavily than either of them.

Petrol VAT rates as compiled in the ethanol-SGST piece. Devolution ratio recomputed here on a consistent all-state basis (PIB’s 1 August 2026 devolution instalment share ÷ FY2025-26 effective-GST share, SGST + IGST settled), so figures differ slightly from the narrower matched-state table in this blog’s earlier devolution piece, though the direction and rough magnitude are the same. Ratio <1× = net devolution “donor”; >1× = net “receiver.”

The pattern holds cleanly for the three highest-VAT states: Telangana, Karnataka and Maharashtra carry the highest petrol VAT rates in the table (35.2%, 29.84% and 25.0%), are the three states losing the most to the ethanol-SGST gap in absolute exposure, and are each pronounced net devolution donors (0.49×, 0.49× and 0.34×). Gujarat (13.7%) and Tamil Nadu (13.0%) complicate the picture rather than extending it: both are still firmly donor states (0.48× and 0.54×) despite having the two lowest petrol VAT rates in the table — lower than Uttar Pradesh’s 19.36%. Uttar Pradesh, in other words, is not the low-VAT outlier the ethanol-exposure logic would predict; it actually taxes petrol more heavily than Gujarat or Tamil Nadu, yet it is by far the largest net devolution receiver (2.13×). Donor status here tracks with something broader than fuel-VAT exposure alone — Gujarat and Tamil Nadu are donors at the two lowest VAT rates in the sample, and Uttar Pradesh is the outlier receiver at a VAT rate higher than theirs. What the table shows cleanly is that five of the six states here, spanning the full range of petrol VAT rates, are net donors, while Uttar Pradesh alone is the outlier receiver — and that the VAT-rate-driven ethanol-SGST exposure argument applies most tightly to Telangana, Karnataka and Maharashtra specifically, not to the donor-state group as a whole.

Related on this blog

See also: Who Collects India’s GST, and Who Actually Gets It Back · A Tax Play: Grow Ethanol SGST Revenue, Cut CNG VAT to Match Low-Tax States · Tamil Nadu’s GST Gap

Sources

• State minister’s proposal to the GST Council on shifting the CGST:SGST split toward 70–80% SGST, as reported in press/tax-industry coverage of GST Council revenue-sharing discussions
• Karnataka Chief Minister’s economic advisor, on raising vertical devolution from 41% to 50% and Karnataka’s horizontal share from 3.64% to 5.24% under a GSDP-weighted alternative formula, as reported via Deccan Herald and related coverage
• Reporting on the gap between official (41%) and effective (~29–30%) devolution shares, attributed to the growing share of cesses and surcharges outside the Article 270 divisible pool
• This blog’s own GST collection vs. devolution analysis (GSTN statistics, PIB devolution release) and ethanol SGST / CNG VAT analysis (PNGRB rate data, modelled fiscal figures), both previously published on this blog

This piece connects two previously published analyses on this blog and does not introduce new primary data collection of its own. The devolution ratio table in Section 3 is recomputed on a broader, more consistent state sample than the narrower table in this blog’s earlier devolution piece, so absolute figures differ slightly (direction and rough magnitude are unchanged); see that piece for the original figures and full methodology notes. The ethanol-SGST shortfall figures cited here carry the same caveats disclosed in the original ethanol piece — modelled fiscal figures using fixed petrol/ethanol price assumptions, not state treasury filings. This piece does not take a position on which specific devolution-formula reform, if any, should be adopted.

About this article: Researched, written and edited by Umashankar Triplicane Dwarakanathan, with AI research assistance; every figure is meant to trace to the primary source cited. See the Editorial Policy for how sourcing, AI use and corrections work.