The Finance Commission determines devolution formula for tax revenue sharing between Centre and states every five years. The 15th FC (2020-2025) allocates 41% of divisible pool to states. GST compensation mechanism, originally designed for five years post-2017 implementation, provided states guaranteed 14% annual revenue growth. However, COVID-19 disrupted collections, leading to Centre borrowing ₹2.69 lakh crore for compensation. The mechanism ended in June 2022, creating fiscal tensions as states demand extension while Centre emphasizes self-reliance and improved tax buoyancy.

Centre-State financial relations form the bedrock of India's federal fiscal architecture, with the Finance Commission serving as the constitutional arbiter of revenue distribution. The 15th Finance Commission's recommendations reflect evolving priorities - increasing states' share to 41% while emphasizing performance-based incentives for fiscal consolidation, demographic transition, and forest cover. The GST compensation saga reveals the complexities of cooperative federalism during crisis. Initially, the Centre guaranteed states 14% annual revenue growth to secure GST rollout consensus. When collections fell short during COVID-19, the Centre's decision to borrow for compensation rather than directly funding it sparked constitutional debates about federal obligations. Post-compensation era challenges include states' reduced fiscal autonomy, dependence on Centre for borrowing permissions under Article 293(3), and pressure to maintain growth momentum without guaranteed revenue streams. This reflects broader tensions between fiscal federalism ideals and practical governance needs, especially relevant given states' expanding expenditure responsibilities in health, education, and social security while facing constrained revenue options.