SCS is a classification given by the Centre to assist development of states that face geographical and socio-economic disadvantages.
Constitution does not make a provision for SCS and this classification was later done on the recommendations of the Fifth Finance Commission in 1969.
Status was first accorded to Jammu and Kashmir, Assam and Nagaland in 1969.
SCS for plan assistance was granted in the past by the National Development Council of the erstwhile Planning Commission.
Eleven States including Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, Uttarakhand and Telangana have been accorded the special category state status.
- Telangana, the newest State of India, was accorded the status as it was carved out of another state Andhra Pradesh.
The 14^th Finance Commission has done away with the ‘special category status‘ for states, except for the Northeastern and three hill states.
- It suggested to fill the resource gap of such states through tax devolution by increasing it to 42% from 32%.

The constitution provides special status through an Act that has to be passed by 2/3rds majority in both the houses of Parliament whereas the special category status is granted by the National Development Council, which is an administrative body of the government.
- For example, Jammu and Kashmir enjoyed a special status as per Article 370 and also special category status. But now that Article 35A has been scrapped and it has become a union territory with legislature, special category status doesn’t apply to J&K anymore.
Special status empowers legislative and political rights while special category status deals only with economic, administrative and financial aspects.

The Centre pays 90% of the funds required in a centrally-sponsored scheme to special category status states as against 60% or 75% in case of other states, while the remaining funds are provided by the state governments.
Unspent money in a financial year does not lapse and is carried forward.
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.
Preferential treatment in getting central funds.
Concession on excise duty to attract industries to the state.
These states can avail the benefit of debt-swapping and debt relief schemes.

It causes Increased burden on Central Finances.
Also, giving special status to a state leads to demands from other states too. For instance, demands from Andhra Pradesh, Odisha and Bihar.
Affecting Federalism: It affects the centre state financial relations and hinders competitive federalism among the states.

As suggested by 14^th Finance commission, tax devolution to states has been increased to 42% and the same has been continued by 15^th FC (41%) too to fill the resource gap without extending SCS.