When the Goods and Services Tax (GST) was implemented on 1 July 2017, it was described as the most ambitious fiscal reform undertaken since Independence. While public discourse largely focused on compliance, tax slabs, and economic impact, the deeper transformation occurred at the constitutional level. GST did not merely replace multiple indirect taxes; it restructured the fiscal relationship between the Union and the States.
Nearly a decade later, an important constitutional question persists: does the GST framework strengthen cooperative federalism, or does it gradually shift fiscal power toward centralisation? The answer lies in understanding the constitutional design, institutional mechanisms, and judicial interpretation that shape the GST regime.
I. Constitutional Transformation Through the 101st Amendment
The Constitution (One Hundred and First Amendment) Act, 2016 introduced GST into the constitutional framework. This amendment significantly altered the distribution of legislative competence between the Union and the States.
The key provisions inserted or amended include:
- Article 246A – conferring simultaneous powers on Parliament and State Legislatures to legislate on GST.
- Article 269A – dealing with levy and collection of GST on inter-State supplies.
- Article 279A – establishing the GST Council.
- Amendments to Article 270 – governing distribution of GST revenue.
Article 246A is particularly noteworthy. Unlike the traditional scheme under the Seventh Schedule, which demarcates Union List and State List subjects, Article 246A grants concurrent taxing powers specifically for GST. Both Parliament and State Legislatures can enact laws on GST. However, Parliament retains exclusive power over inter-State trade or commerce under Article 269A.
This structure reflects a constitutional innovation: a concurrent fiscal field with a central tilt in inter-State transactions. It signals collaboration but preserves national uniformity in cross-border commerce.
II. GST Council: Institutionalising Cooperative Federalism
At the operational core of GST lies the GST Council, constituted under Article 279A. The Council comprises:
- The Union Finance Minister (Chairperson),
- The Union Minister of State for Finance,
- Finance Ministers of the States.
The Council makes recommendations on tax rates, exemptions, threshold limits, special provisions for States, and model GST laws.
The voting structure is constitutionally designed to balance power:
- The Central Government holds one-third of the total voting weight.
- All States collectively hold two-thirds.
- A three-fourths majority is required for decisions.
On its face, this arrangement appears to embody cooperative federalism. Decisions ideally emerge from consultation rather than unilateral action. In practice, most resolutions have been adopted by consensus rather than formal voting, reinforcing the deliberative character of the institution.
However, the legal status of the Council’s “recommendations” became a critical constitutional issue.
III. Judicial Clarification: The Status of GST Council Recommendations
The Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd. addressed whether the GST Council’s recommendations are binding.
The case arose from a challenge to the levy of Integrated GST on ocean freight under the reverse charge mechanism. While examining the broader constitutional structure, the Court made significant observations:
1. The recommendations of the GST Council are not binding on Parliament or State Legislatures.
2. Article 246A confers independent legislative powers on both levels of government.
3. The Council functions as a constitutional body facilitating cooperative federalism, not as a supra-legislative authority.
The Court emphasised that the Indian Constitution envisions a federal structure with a strong Centre but does not subordinate States to Union dominance in areas of concurrent competence. GST, therefore, represents a collaborative model rather than a command structure.
This judgment reinforced the principle that fiscal federalism must operate within constitutional boundaries.
IV. Federalism as Part of the Basic Structure
The interpretation of GST cannot be divorced from the broader constitutional doctrine that federalism forms part of the Basic Structure.
In S.R. Bommai v. Union of India, the Supreme Court unequivocally held that federalism is a basic feature of the Constitution. Although the case concerned Article 356, its doctrinal significance extends to fiscal arrangements.
Similarly, in State of West Bengal v. Union of India, the Court recognised India as a federation with a strong Centre. The judgment clarified that while sovereignty is divided, Parliament’s authority may be expansive in certain domains.
These decisions provide the constitutional lens through which GST must be examined. The system must preserve federal balance while enabling national economic cohesion.
V. Revenue Sharing and Compensation: Testing the Federal Compact
To secure State participation in the GST regime, Parliament enacted the GST (Compensation to States) Act, 2017. The statute guaranteed compensation to States for revenue losses for five years, calculated at a 14% annual growth rate.
This mechanism was central to achieving political consensus. However, the COVID-19 pandemic severely disrupted revenue collections, leading to disputes over compensation payments. Several States argued that delayed compensation undermined fiscal autonomy.
While borrowing mechanisms were eventually structured to address the shortfall, the episode exposed vulnerabilities in the cooperative model. States’ reliance on centrally administered compensation highlighted concerns about fiscal dependence.
Although the constitutional framework remained intact, the operational strain revealed the delicate nature of fiscal federalism under GST.
VI. Legislative Policy and Judicial Deference
The Supreme Court has also shown deference to legislative choices within the GST framework.
In Union of India v. VKC Footsteps India Pvt. Ltd., the Court upheld the validity of Rule 89(5) of the CGST Rules relating to refund of unutilised Input Tax Credit. The Court emphasised that fiscal legislation involves complex economic choices and should not be invalidated unless manifestly arbitrary.
This approach reflects judicial recognition of coordinated fiscal policymaking under GST. At the same time, it underscores the judiciary’s limited role in second-guessing economic policy.
VII. Indicators of Cooperative Federalism
Several features of GST support the argument that it strengthens cooperative federalism:
1. Concurrent Legislative Competence under Article 246A.
2. Institutional Dialogue through the GST Council.
3. Revenue Distribution Mechanisms under Article 270.
4. Consensus-Based Practice, with most decisions taken unanimously.
5. Judicial Affirmation of legislative autonomy in Mohit Minerals. The design encourages negotiation, consultation, and shared responsibility.
VIII. Signs of Fiscal Centralisation
At the same time, certain structural realities suggest a centralising tendency:
1. Parliament’s exclusive authority over inter-State supplies under Article 269A.
2. Strong agenda-setting influence of the Union within the GST Council.
3. Limited fiscal experimentation space for States.
4. Dependence on centrally administered compensation arrangements.
Uniformity in tax rates, though economically beneficial, reduces State-level flexibility. Critics argue that the practical dominance of national considerations may dilute State autonomy over time.
IX. An Evolving Constitutional Experiment
GST is not a static construct; it continues to evolve through amendments, rate rationalisation, and judicial scrutiny. Its endurance depends not solely on constitutional text but on cooperative political culture.
The Supreme Court in Mohit Minerals described GST as a manifestation of cooperative federalism rooted in dialogue. That characterisation remains aspirational as much as descriptive.
The real test lies in balancing national economic integration with meaningful State participation.
Conclusion
The constitutional architecture of GST represents a carefully negotiated fiscal compromise. Articles 246A, 269A, and 279A collectively reshape the federal distribution of taxing powers while preserving legislative sovereignty at both levels.
Judicial decisions, particularly in Mohit Minerals, have clarified that the GST Council’s recommendations are persuasive rather than binding, reaffirming the federal balance. At the same time, practical challenges — especially those concerning compensation and fiscal dependence — reveal the tension inherent in shared taxation.
GST therefore occupies a middle ground. It is neither a model of absolute decentralisation nor an instrument of rigid central control. Instead, it reflects a dynamic and evolving framework of cooperative federalism with centralising features.
Ultimately, the success of GST depends not merely on statutory amendments or judicial pronouncements, but on sustained constitutional maturity. If dialogue continues to guide decision-making, GST can remain a powerful example of collaborative federal governance. If consensus erodes, the perception of fiscal centralisation may deepen.
In that sense, GST is more than a tax reform — it is an ongoing constitutional conversation about the nature of Indian federalism itself.
References
1. Constitution of India – Articles 246A, 269A, 270, 279A.
2. Constitution (One Hundred and First Amendment) Act, 2016.
3. GST (Compensation to States) Act, 2017.
4. Union of India v. Mohit Minerals Pvt. Ltd.
5. S.R. Bommai v. Union of India.
6. State of West Bengal v. Union of India.
7. Union of India v. VKC Footsteps India Pvt. Ltd..
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Author: Madhav Vardaan, 4th Year Law Student at Lovely Professional University.
