GST’s effects on India’s federalism Overview One of India’s most revolutionary fiscal reforms was the implementation of the Goods and Services Tax (GST) by the Constitution (One Hundred and First Amendment) Act, 2016. India’s fiscal federal framework was restructured when the Goods and Services Tax (GST) was introduced on July 1, 2017, replacing a number of indirect taxes imposed by the federal government and the states. The balance of fiscal autonomy between the Union and the States was drastically changed, even if its goal was to establish a single national market.
An Interpretation of Federalism in the Indian Setting India has a quasi-federal system in which the Constitution divides authority between the federal government and the states. A key element of this system is fiscal federalism, which gives both governmental levels the power to impose and collect taxes. Prior to the GST, states had the authority to impose taxes on their own, including VAT, entry taxes, luxury taxes, and amusement taxes. By adopting a dual GST model—CGST (Central GST), SGST (State GST), and IGST (Integrated GST for inter-State transactions), GST reorganized this system.
The GST Council: A Brand-New Federal Agency Perhaps the most important institutional reform brought about by GST is the establishment of the GST Council under Article 279A of the Constitution.
The Council consists of: All State Finance Ministers, the Union Minister of State for Finance, and the Union Finance Minister (Chairperson) A 3/4th majority is needed to make decisions using a weighted voting system (1/3 weight for the Center and 2/3 weight for the States collectively). Benefit: Encourages cooperative federalism. promotes decision-making by consensus. gives states a way to actively participate in the creation of tax laws. Issues: States gave up much autonomy over taxation. Collective decision-making currently governs fiscal autonomy.
Effect on States’ Fiscal Autonomy The claim that the GST has undermined state financial independence is among the most forceful objections.
1. The loss of the ability to tax independently States are no longer able to change indirect tax rates on their own. They have to rely on the decisions made by the GST Council.
2. The Issue of Compensation Under the GST (Compensation to States) Act of 2017, the Center pledged five-year compensation to allay revenue concerns. However, the COVID-19 outbreak caused delays that strained relations between the federal government and the states and raised concerns about budgetary confidence.
3. Greater Central Power Critics contend that despite the GST’s collaborative nature in theory, the Center has more practical sway due to its administrative and financial might.
Federalism: Competitive versus Cooperative With the introduction of the GST, India’s fiscal federalism model changed from one in which States competed by imposing different taxes to one in which uniformity is valued above competitiveness. Both benefits (economic unification) and drawbacks (restricted state fiscal experimentation) result from this change.In conclusion The GST has had a transformational but varied effect on Indian federalism.
On the one hand, it has made states more reliant on the Center and reduced their fiscal sovereignty. However, it has established a harmonized indirect tax system and formalized cooperative federalism under the GST Council. In the end, GST is a growing experiment in Indian federalism that strikes a balance between autonomy and cooperation as well as unity and variety. Maintaining fiscal trust, openness, and sincere joint decision-making between the Union and the States are essential to its long-term viability.
Author Bio
