Testing Fiscal Federalism: GST Gains and the Resurgence of Interstate Border Levies

The Punjab–Himachal car levy protest highlights deeper tensions in India’s fiscal federalism. While GST unified the national market by dismantling border barriers, rising state-level entry taxes risk reviving pre-GST frictions and testing the balance between state autonomy and economic integration.

Fiscal Federalism at the Crossroads:

Punjab–Himachal Car Levy Protest and the Unfinished Agenda of GST-Led National Integration

I. Introduction: When a Border Fee Becomes a Federal Flashpoint

The recent Punjab–Himachal border protests against the sharp hike in vehicle entry fees by Himachal Pradesh have reopened a larger national debate:

Are we witnessing a quiet return to the fragmented, pre-GST India?

The levy—raising charges for out-of-state vehicles (e.g., private cars from ₹70 to ₹170)—has triggered protests in border districts of Punjab, where residents depend on daily cross-border mobility for trade, employment, healthcare, and education.

While the issue appears local, it carries profound implications for:

Fiscal federalism
Inter-state trade integration
Centre–State power dynamics
The legacy of the 2017 GST reform

This episode must be understood not as an isolated protest, but as a stress test of India’s post-2017 economic architecture.

II. The 2017 GST Reform: From Fragmentation to a Unified Market

Goods and Services Tax was not merely a tax reform—it was a logistical revolution disguised as fiscal policy.

Pre-GST India: The Fragmented Market

Before 2017:

Multiple taxes: CST, VAT, Octroi, Entry Tax
Border checkposts at every state boundary
Physical inspections and rent-seeking
Logistics costs at 14% of goods value
Estimated GDP loss: ~0.98% due to waiting costs

Truck detention at state borders was described as the “greatest malaise” of the transport sector.

Internal trade barriers in India were estimated to be 5 times higher than the US.

III. Structural Mechanics of GST: How It Dismantled Barriers

GST replaced origin-based taxation with a destination-based consumption model, eliminating the fiscal need to stop goods at state borders.

Three pillars enabled this transformation:

GST Council – Institutionalized cooperative federalism.
GST Network (GSTN) – Shifted compliance from roadside to cloud.
e-Way Bill System (2018) – Digitized goods movement.

Empirical Impact (GPS Evidence from 29,000 Trucks)

Border crossing times fell by 25–32 minutes nationally.
Eastern India saw gains up to 3 hours per crossing.
Household expenditure increased by up to 23% in highly exposed districts.

GST acted as a regional equalizer, integrating the Northeast and Eastern corridors into national supply chains.

IV. The Resurgence of State-Level Frictions: Vertical Fiscal Imbalance

Despite GST integration, states face a persistent Vertical Fiscal Imbalance:

States handle large expenditure responsibilities.
Revenue-raising capacity remains constrained.
Post-compensation period pressures intensify fiscal stress.

The Himachal vehicle entry levy reflects this structural tension.

Why This Matters

Though technically outside GST (since it applies to vehicles entering territory rather than goods), such levies recreate:

Border friction
Compliance uncertainty
Transaction costs
Psychological barriers to mobility

This mirrors pre-GST logic—reintroducing physical enforcement at borders.

V. Constitutional and Federal Dimensions

The controversy touches multiple constitutional themes:

1. Freedom of Trade and Movement

Article 19(1)(d): Freedom of movement.
Article 301: Freedom of trade, commerce and intercourse.

2. National Highways Question

If levies apply at entry points connected to Union-funded National Highways, it raises questions of federal overreach.

3. Cooperative Federalism vs Competitive Federalism

GST sought harmonization through the GST Council.
Entry levies risk fragmenting that harmonized architecture.

VI. Border Communities: The Human Cost

The most immediate impact is not macroeconomic—but local.

Affected groups include:

Daily commuters
Students
Patients accessing hospitals
Small traders
Tourism operators

For many border residents, state boundaries are administrative—not economic realities.

The protest slogan captures the sentiment:
“Borders may exist on maps, but not in our lives.”

VII. The Policy Risk: A Slippery Slope Back to Checkpost India?

If states increasingly resort to:

Entry fees
Tourist levies
Transport surcharges
Checkpost-based enforcement

India risks a gradual erosion of its unified internal market.

The National Informatics Centre (NIC) has already intervened in other contexts to block unauthorized checkpost modules on the Parivahan portal for All India Tourist Permit vehicles—showing that the Centre recognizes the threat.

The larger danger lies not in one levy—but in normalizing fiscal gatekeeping.