Special Category States under the GST regime in India are certain states and union territories that enjoy special status such as being exempted from customs duty, excise duty, corporate tax, income tax, and other taxes to attract investment.

GST special category states often face unique developmental and economic challenges, and as a result, they receive these specific benefits and concessions to promote growth. 

Did you know 30% of the Centre’s gross budget also goes to special category states?

Among the criteria for classification as special category states, hilly or difficult terrains, income levels, and other socio-economic factors play a significant role. For example, Himachal Pradesh is one of these states, benefitting from GST incentives due to its hilly terrain and lower income levels. These concessions aim to boost investment, industrialization, and employment opportunities in these regions, ultimately fostering their infrastructural and economic development.

What is Special Category Status?

The special category status is an India designation for some states and union territories and offers fiscal and developmental benefits as per Section 22 of the Goods and Services Tax. This was recommended by the National Development Council recommended.

Some key features of special category states include:

1. Central Assistance: Special category states receive preferential treatment from the Center in terms of grants, aid, and economic support for social development.
2. Tax Concessions: It is a fact that these states enjoy tax holidays and exemptions so as to attract investments and boost industrialization. In such a case, they may get discounts in the Goods and Services Tax (GST) regime.
3. Low Per Capita Income: Typically, states with lower per capita income, challenging topography, and other socio-economic indicators are considered for special category status.
4. Plan Assistance: The central government funds a major part of its yearly plans that assist in construction, education, and health.
5. Flexible Funding: Special category status gives states more flexibility in fund utilization to address issues peculiar to them.

Why are Special Category States Given Special Treatment under GST?

There’s a GST special treatment for special category states under based on specific parameters that are defined under the Gadgil Formula. These parameters are:

1. Hilly Terrain: Rugged landscapes in states like Himachal Pradesh and Uttarakhand present challenges in infrastructure development, transportation, and industrial growth. To combat these geographical challenges, special GST provisions aim at tax incentives that encourage investment and industrialization in these areas.
2. Low Population Density and/or Sizeable Share of Tribal Population: States like Arunachal Pradesh or Mizoram with low population density or tribal populations suffer from limited access to education, healthcare, and employment. Specific GST policies should be set up to encourage growth, social development, and infrastructure in those areas.
3. Strategic Location along Borders with Neighboring Countries: Some states like Jammu and Kashmir as well as some northeastern states have borders with neighboring countries. Such a strategic location may give rise to some unique security concerns and infrastructural hurdles for them. The special GST provisions support investments in border areas, which contribute towards security and trade opportunities.
4. Economic and Infrastructure Backwardness: There are common challenges such as lower income levels and underdeveloped infrastructure. These states are given special GST concessions to boost their economic performance by encouraging development.
5. Nonviable Nature of State Finances: Some states have nonviable state finances that can make it difficult to support critical services such as education and health. These fiscal challenges are however addressed with special GST treatment such as financial assistance and flexibility in fund allocation with a view of promoting better social development.

List of Special Category States under GST

Here are the 11 states in India which have the status of special category states under GST:

• Arunachal Pradesh
• Assam
• Himachal Pradesh
• Manipur
• Meghalaya
• Mizoram
• Nagaland
• Sikkim
• Tripura
• Uttarakhand
• Telangana

Benefits for Special Category States under GST

There are various GST benefits for special category states. These are:

• Funds and Concessions from the Centre

The Centre pays 90% of the funds required in a centrally-sponsored scheme to special category status states as against 60% or 75% in the case of other states, while the remaining funds are provided by the state governments. Significant concessions are provided to these states in excise and customs duties, income tax, and corporate tax. 30% of the Centre’s Gross Budget goes to Special Category states. 

• Tax Concessions and Promotion of Industrialization

Industrialization is encouraged by lower GST rates as well as investment incentives. As a result, it generates jobs and economic growth – particularly within areas that are populated by tribes and have poorly developed industries.

• Infrastructure Development and Improvement in Socio-economic Indicators

The federal government also provides funding for infrastructural development of special category states. This encompasses investments into roads, bridges, etc., to enhance connectivity and transportation, which are the challenges presented by hilly terrains. The concessions go a long way in giving more money towards social development, education, and healthcare. Thus, these states experience an improvement in literacy level, healthcare, and quality of life.

• Reduced Regional Disparities

The main aim of giving benefits to special category states is to bridge the gap between the regions. These are regions with lower per capita income and economic and social challenges. These states’ special GST provisions aim at bridging the development gap between them and the economically advanced regions.

• Flexible Funding

There is also flexibility in fund allocation in special category states. This enables them to customize resources to suit their unique development requirements, enhancing the efficacy of developmental ventures.

• Strengthening Border Areas

Investments such as security and trade are located where the states are in a strategic position to their neighbor’s borders. This is important for ensuring the stability and development of economies in these regions.

• Boosting Nonviable State Finances

For example, the state finances are nonviable in some regions, which means special GST provisions exist that assist in funding essential services like education and healthcare.

How GST Affects Special Category States

Special category states are affected by the Goods and Services Tax (GST) in multiple ways, both positively and negatively, subject to the prevailing conditions and policies. Here are the key ways in which GST impacts special category states:

Positive Impacts

1. Tax Concessions and Benefits from the Centre: GST provides special category states with reduced tax rates on most goods and services. This can lower the cost of living for residents and therefore make such states more appealing to businesses.
2. Promotion of Industrialization: Industrialization is promoted by lower GST rates and incentives for special category states. The result is the creation of jobs and growth of the economy especially in areas with large numbers of tribes and low industrial levels.
3. Improved Socio-economic Indicators: The special category states are usually allocated more resources in the social development sector like education and health. It also increases literacy rates, access to healthcare, infrastructural development like building better roads and highways, and quality of life.

Negative Impacts

1. Initial Implementation Challenges: Special category states face initial challenges during the transition to the GST system because they have to adjust to new tax structures, compliance procedures, and administrative systems.
2. Complex Compliance: Compliance with GST can be complex, especially for special category states which might experience further implementation difficulties as a result of their special circumstances. States with minimal resources may find the administrative burden of GST to be challenging.
3. Impact on State Revenues: Transitional periods of loss of state revenues are expected within special category states to fill in the gaps between lower GST rates and central compensation.

Impact on Revenue Generation and Fiscal Autonomy

• Positive Impact on Revenue Generation

Streamlined Tax System and Increased Economic Activity: GST simplifies tax structure, thus more efficient and transparent. This simplified tax system could enhance revenue generation in special category states. The increased economic activities can also lead to higher tax revenues, particularly for GST, as businesses grow and succeed.

• Negative Impact on Revenue Generation

Initial Revenue Decline and Reduced Flexibility in Tax Policy: The initial state collections will fall as a consequence of low GST rates on some goods and services as a special state. The states have little discretion regarding setting their own rate of taxation under GST. Tax policies may be less controllable within special category states, as opposed to non-special category states, thus affecting their capacity to customize the tax rates to suit their specific needs.

• Impact on Fiscal Autonomy

Dependency on Central Assistance: Special category states depend on their central government for revenue support, due to shortfalls. Although this support is very important for the financial stability of the students, it can create some level of dependency that affects their fiscal autonomy.

Limited Control Over Tax Rates: Under GST, special category states are unable to impose varied rates of tax. These limit their fiscal independence to the extent of imposing a uniform tax scheme defined by the GST Council.

Case Studies and Examples from Specific States

• Himachal Pradesh

Himachal Pradesh is a hilly state with limited industrialization. However, Himachal Pradesh received special category status under GST. This led to an increase in industrial investment in the state through the provision of attractive tax incentives. As a result, many manufacturing sites were established and more jobs were created.

Impact: This led to an increase in the state’s revenue collection due to the increased economic activities and GST which enhanced the fiscal autonomy and reduced the state’s dependency on central assistance.

• Assam

The special tax concessions extended to the special category states such as Assam with its high tribal population and economic woes also helped in this context. The concessions encouraged SMEs in the state, especially in the tea and handloom industries.

Impact: Socio-economic conditions also improved due to the state’s revenue generation from GST rising as SMEs thrived.

Frequently Asked Questions

• What does the specialdoes special category mean?

“Special category” is a label given to some states in India, largely due to the lower income status of some people within the regions and the presence of certain special challenges that include hilly terrain, tribal people, and poor infrastructure. States in this state enjoy specific benefits and concessions under different government policies aimed at promoting economic development and reducing regional disparities, including the Goods and Services Tax.

• What are the special category states under Section 22?

Section 22 special category status is a designation in India that provides some selected states and union territories with extraordinary fiscal advantages and developmental advantages.

• Is Jammu and Kashmir a GST special category state?

Both Jammu and Kashmir and Ladakh are not a special category state under GST anymore.

• Which article specifies special category states under the GST regime?

Under the GST regime, there are no special category states but the same is identified as per the specifications established by the GST Council and the recommendations issued by the National Development Council. It is provided under Section 22 of the Goods and Services Tax Act.

• Which state is exempt from GST?

Jammu and Kashmir were exempted from GST before the abrogation of Article 370 of the Indian Constitution which granted it a lot of autonomy over its taxation and legislative powers. Nevertheless, the state was put under the GST regime after the abrogation of Article 370 in 2019 and the exemption ceased to exist.

• How many special category states are there?

Eleven states come under this category, namely, Arunachal Pradesh, Assam, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand, and Telangana.

• Why is Jammu and Kashmir exempted from GST?

Article 370 of the Indian constitution had a special provision for Jammu and Kashmir. The state therefore did not adopt Goods and Services Tax initially since this provision enabled it to maintain its tax regime. This exemption was derived from the distinctive historical and political settings peculiar to Jammu and Kashmir and its unique status within the Indian Union. However, article 370 has since been abrogated in August 2019 to allow Jammu and Kashmir to embrace GST.

Aaryan Singh

B.Com degree with finance and accounting Specialisation in Goods and Service Tax (GST) and taxation system Completed certification course on GST from ICAI in 2022 Online GST practitioner course completed in 2023 from Indian Institute of Skill Development and Training.

See Full Bio