The Centre-State Relations and Tax Governance in India: An Analysis of Post GST Reforms

Abstract

  On July 1, 2017, India introduced the Goods and Services Tax (GST), which drastically transformed Centre-State relations and tax administration from a fragmented indirect tax regime to a unified, destination-based system. This paper examines post-GST reforms as they relate to fiscal federalism, revenue distribution, and intergovernmental relations. Central to these reforms is the 101st Constitutional Amendment, which created concurrent taxation powers under which GST can be levied by both the Centre and states, thus reinforcing the role of the GST Council — a mechanism to act collectively with consensus — as a governance mechanism. 

This transition intended to remove the effects of tax-related cascading, enhance economic integration, and ensure more equitable sharing of revenue through mechanisms like the compensation cess and input tax credit. Yet, the analysis highlights changes in Centre-State relations, where the Council’s voting system—supporting the Centre with a one-third vote—has incited discussion on state autonomy and fiscal sovereignty. Transparent governance of post-GST taxation, digital regulation with the national integration of transactions through the GST Network, and lower barriers to interstate trade have also contributed towards a new model, in which a common market has been created. 

However, difficulties are still unresolved, including state revenue deficits, classification disputes, and administrative complications burdening small businesses. The reforms have increased fiscal dependence in the face of economic disruptions (e.g., the COVID-19 pandemic), leading states to depend on central compensations. Importantly, GST promotes cooperative federalism but also highlights the competing forces of centralization and decentralization. It recommends further clarification of structural reforms like enabling states' role in policy formulation and simplifying compliance — the article argues for India to attain sustainable Centre-State harmony with balanced tax governance for economic development.

Key Words: Cooperative Federalism, Governance, Reform, Gst 

1.Introduction: India's federal system, found in the Constitution, articulates an explicit division of responsibilities between the centre and states, including legislative, administrative, and financial domains (Chauhan & Jaiswal, 2025). Such a quasi-federalism, with unitary aspects, fosters a cooperative federalism to respond to common economic, social and political problems. Before GST, India had a patchwork indirect tax regime where the centre would levy excise duties, service tax and customs, with states having a monopoly on VAT, sales tax and other levies. That meant inefficiencies—tax cascading, interstate road blocks and revenue crises. 

The GST through 101st Constitutional Amendment Act, 2016 and came into force on 1 July 2017 included various taxes in an integrated context to a destination-based system (Joseph & Kumary, 2023). Designed to help create the "one nation, one tax," it was implemented to make taxation more efficient, to encourage compliance and to encourage economic integration. Yet this reform has radically reconfigured centre-state financial relations in that a number of taxation powers have come to centralization, with the establishment of mechanisms such as the GST Council for co-governance (Ratha, 2023). Supporters think of it as a move in the direction of cooperative federalism, critics say it undermines state independence, fosters dependence with compensation, and reveals weaknesses in its revenue sharing apparatus. This article discusses the implications of the post-GST reforms on the centre-state relations and tax governance. It examines historical context, constitutional amendments, impacts on fiscal autonomy, challenges, and recommendations, based on qualitative and quantitative analyses from secondary sources.

2.Literature Review: Scholarly discussion on GST and federalism indicates its Janus-faced character both as a unifying reform and as a possible hub. Bagchi (2006) claimed that GST should focus on trade-offs in operation in a federal system, and Rao (2016) attacked early estimates about RNR as insufficiently taking into account the state context. Post-implementation studies (e.g., Mukherjee, 2020) have empirically measured GST efficiency across the states using stochastic frontier analysis to identify gaps in compliance and revenue growth divergence. Joseph and Kumary (2023) discuss that India's “Indianized GST paradigm,” based on GST Council and the principles of revenue neutrality, tax sharing, compensation, leads to coercive federalist policies because of design problems. Likewise, Malagi and Walikar (2025) comment on the centralization of taxation powers by the GST system, resulting in interdependencies in both areas, but with potential pitfalls of regional imbalances. Chauhan and Jaiswal (2025) carry out a qualitative review which uses case studies to assess GST redefine cooperative and competitive federalism. Ratha (2023) provides a useful critical perspective on the economic relationship with GST which emphasizes the loss of state sovereignty and reliance upon central payments. These works highlight the contradiction of GST's efficiency gains relative to what could be said about the federal implications, as reported in the form of empirical data from places such as Kerala which shows both declining revenue and growing dependence on the central government (Joseph et al., 2022).

3.Methodology: This study uses this qualitative and secondary data analysis method, incorporating data from academic papers, government reports, and empirical studies. Key contributions are, however, GST collections analyses, state tax-GSDP ratios, plus state case studies such as those conducted by Kerala. The quantitative information is based on official statistics and assessments by academic scholars about revenue growth (e.g., CGST, SGST, IGST) for 2017-2024. The review compares pre- and post-GST periods to analyze implications for fiscal autonomy and governance while maintaining some balance between cooperative and coercive federalism aspects.

4.Historical Context of Centre-State Tax Relations: The historical trajectory of fiscal federalism in India has been built on the finance commissions of the Union and provisions in the Constitution on tax power set forth in the 7th Schedule. Prior to GST the states continued to be autonomous regarding the sale of goods and the VAT, responsible for 60-65% of their receipts, with the centre responsible for excise and services (Joseph & Kumary, 2023). This left a situation of vertical imbalances, as states currently spent 60% on total expenditure while only receiving 40% of revenue. The effort for GST began in 2000 with Vijay Kelkar Task Force, which worked at the issue of cascading taxes and inefficiencies. The 122nd Amendment Bill (2014) marked a departure from the previous negotiations and paved the way for the 101st Amendment in a cooperative spirit because, at the time, the government feared granting fiscal autonomy to states (Chauhan & Jaiswal, 2025). 

5.GST Implementation and Constitutional Changes: A significant reform, the Goods and Services Tax (GST) was introduced in India which sought to amalgamate multiple central and state level charges into a uniform total regime. Before GST the taxing structure had been disjointed with non-tax measures such as VAT, Central Excise Duty and Service Tax generating domino effects and inefficiency, across the borders. GST was initiated by the proposal of Vijay Kelkar Task Force in 2000 which recommended an integrated tax system to encourage economic growth and compliance. The GST was put into operation on July 1, 2017, in the wake of several years of discussion that resulted in enabling legislation. They were aiming to establish a single national market that can absorb taxes, reduce tax evasion through the use of input tax credit, and promote the collection of taxes through the expansion of tax base. Largely constitutional modifications had to be adopted to reshape tax authority along federal lines for GST. Article 246A of the Constitution (101st Amendment) Act, 2016 was significant and provided the Parliament and the state legislatures with concurrent powers of applying GST on the provision of goods and services. Article 269A was also added by this amendment which gave scope to the Centre to charge and claim Integrated GST (IGST) on interstate supplies, to be shared between the Union and states. Article 279A also formulated the GST Council, a constitutional entity composed of the Union Finance Minister and state representatives, to advise about tax rates, exemptions etc.

This was to rectify the pre-existing imbalance of taxes that had occurred under the Seventh Schedule which allowed certain taxes to be retained largely in the central or state spheres. The legislative amendment processes were underway in 2014, the Constitution (122nd Amendment) Bill emerged, and it was tried in parliamentary committees before it passed in 2016. The legislation amended various entries in the Union List and State List of the Seventh Schedule and treated many of the taxes such as sales tax and entry tax as components of GST. States faced a GST Compensation Cess against potential revenue losses to compensate for what they could have foregone, ensuring buy-in from producing states that had been slow to implement the shift to a destination-based tax system. The framework also institutionalized joint decision-making, which was consistent with cooperative federalism, though it centralized certain administrative areas under the Central Board of Indirect Taxes and Customs (CBIC). GST has been refined post-implementation, with rate rationalisations and technology-driven checks through the GST Network (GSTN). The dual GST setup—between Central GST (CGST), State GST (SGST), and IGST—has made taxation more efficient, but has raised questions of fiscal independence, as many states agreed to give up considerable revenue-raising authority. 

More recent empirical research reveals better macroeconomic indicators, including greater tax-to-GDP ratios and lower logistics expenses, although early difficulties — including technical issues and revenue shortfalls — persisted. Supreme Court decisions, including in such cases as the Mohit Minerals one, have entrenched the GST Council's recommendatory role and bolstered parliamentary sovereignty. With GST, in short, centre-state relations have been altered by constitutional reforms in a manner that promotes interdependence but incites debates over equity and federalism. The reform has significantly been successful in increasing tax effectiveness and economic inclusion, though there are still concerns over continued marginalization of petroleum products and regional disparities. Future amendments may also need to be made to ensure alignment of national standards with their requirements for each state to sustain a consistent and efficient fiscal regime in a pluralistic India's economy.

6.Impact on Centre-State Relations: The objective of this reform was to improve tax efficiency, minimize the impact of cascading problems and broaden the tax base, facilitating more seamless interstate trade—and economic integration through the concept of a "one nation, one tax." GST tax governance consists of a three-tiered system which mainly incorporates Central GST (CGST), State GST (SGST) and Integrated GST (IGST), regulated by a technology-enabled arrangement handled by the GST Network (GSTN). It has resulted in better compliance and revenue mobilization, going from ₹7.41 lakh crore in 2017-18 to more than ₹20 lakh crore in 2023-24, but it will also mean that administrative controls will be increasingly centralised and fiscal power will transfer from states to the center. Such centralized governance has centre state relations implications, wherein states give up substantial self-government power for tax neutrality and compensation assurances. An important aspect of GST's effect on centre-state relations arose from constitutional amendments to the Constitution that facilitated its adoption, particularly the 101st constitutional amendment act of 2016 providing concurrent taxation powers to the centre and the states through Article 246A. This was a shift from the stark separation of powers that existed in the pre-GST era under the Seventh Schedule, during which special taxes were awarded to each state. The GST Council, established under Article 279A, also institutionalized cooperative federalism — a center with a voting power of one-third and the states two-thirds; a 75% majority was needed for rates, exemptions, and policies. Supporters argue this fosters collaborative governance with more than 50 council meetings, which have rationalized rates and addressed concerns over how they should be implemented. But the structure of the council effectively affords the center veto power, leading critics to see it as a mechanism for coercive federalism in which states’ fiscally-focused choice is increasingly guided by its directives from the centre.

GST, on the other hand, has developed centre-state ties through interdependence and equity for revenue distribution. This IGST mechanism distributes the interstate tax burden between the producing states and the consuming states, which helped offset the pre-GST imbalance where manufacturing states were much hit at earlier years, with origin based taxes. Compensations for revenue losses—assured at 14% annual growth over five years (2017-2022) and financed through a cess—have contributed to stabilizing the financial situation of states, with disbursals totalling over ₹3 lakh crore by 2024. This had incentivised states to be active players in governance — joint efforts to streamline compliance for small businesses and widen the tax net are testimony to this. It is well documented that with empirical evidence that we see greater tax bounce back and less evasion which helps in general fiscal well-being and cooperative dynamics, especially under crisis, e.g. COVID pandemic, where extensions were provided.

The Council's voting mechanism, where the center holds one-third of the votes and states two-thirds, requiring a three-fourths majority for key resolutions, aims to balance federal interests while harmonizing taxation by subsuming various central (e.g., excise duty) and state (e.g., value-added tax) levies into a dual structure: Central GST (CGST) and State GST (SGST) for intra-state supplies, and Integrated GST (IGST) for inter-state transactions, jointly administered to foster a unified national market and mitigate cascading effects. Nevertheless, the implementation process has revealed strains, including reduced state fiscal autonomy from the surrender of independent taxing powers, reliance on central compensation for revenue shortfalls (initially assured at 14% annual growth for five years, later extended due to economic challenges), and exclusions such as petroleum and alcohol that distort the input tax credit mechanism and perpetuate inefficiencies. Although GST has improved transparency, revenue efficiency, and intergovernmental cooperation, detractors contend it has tilted the federal equilibrium toward greater centralization, as evidenced by ongoing disputes over compensation delays and equitable revenue distribution.

To align GST reforms with the vision of Viksit Bharat—a developed India by 2047 focused on robust economic growth, inclusivity, and enhanced ease of doing business—key actionable policy recommendations include rationalizing the multi-tier tax structure to a simplified two- or three-slab system (e.g., 5% for essentials, 18% standard, and a higher rate for de-merit goods) to minimize compliance burdens for micro, small, and medium enterprises (MSMEs) and stimulate consumption-led expansion. Additionally, broaden GST's scope to encompass currently excluded sectors like petroleum products, real estate, and electricity through a phased approach to eliminate distortions, achieve revenue neutrality, and realize a genuine "one nation, one tax" framework while safeguarding state revenues. Further, implement centralized registration, unified single returns, and AI-powered digital platforms for real-time compliance monitoring, invoice matching, and expedited dispute resolution to reduce administrative hurdles and integrate emerging sectors like the gig economy. Finally, institute an enduring equitable revenue-sharing model, potentially elevating states' share to 50% of GST collections with performance-linked incentives, to reinforce cooperative federalism and support balanced regional development.

Yet, while this has brought gains, tax governance under GST also has stressed centre-state relations by degrading the fiscal independence of states and deepening vertical inequality. Governments have lost control of many crucial revenue streams and so are increasingly reliant on central transfers, which have become a large part of 40-50% of their budgets in many cases. Problems from compensation to GST, as well as arbitrary allocations of cess and exclusion of petroleum and alcohol from GST, have caused tension — with states like Kerala and West Bengal under increasing pressure in courts to oppose central dominance. The move towards a single-tax system points to coercive features, as evidenced by battles over borrowing limits and rate uniformity over the recognition of regional differences. If compensation is long overdue after 2022, states will lack revenue and will therefore have to seek reforms if they are not to revert to a better balance between centralised fiscal federalism and individual states’ reliance on the power of the money themselves.

7.Challenges and Issues: The most salient is the loss of fiscal autonomy of a state, since the adoption of GST has absorbed the primary state revenue taxes and imposed very few options for the states to set rates or implement additional taxes without the permission of the GST Council. There is a disadvantage to producing states especially at destination-based taxation since it favours consuming states and disrupts conventional revenue sources. For example, manufacturing-dominated states such as Tamil Nadu and Maharashtra experienced less revenue growth after GST, increasing the inter-state gaps and the relationship frictions with the centre. Not including substances such as petroleum and liquor in the GST not to mention taxes is holding back revenue potential because state control over these things is still in the hands of a state, but they are subject to swings in markets. 

This dependency has been exacerbated by the higher use of cesses and surcharges by the centre, which it does not share with states and are now 25-30% of central revenues, creating a growing fiscal divide and fuelling the growing resistance of those states seeking greater financial independence. Compensation mechanisms have become a flash point in centre-state relations, too, with delays and shortfalls in GST compensation cess payments exposed as failings of governance. The compensation for a period of five years (2017-2022) up to 14% was promised for growth and was extended amid COVID-19-related challenges but disrupted by the centre invoking an "act of God" clause for deferment payments due in March 2022. Kerala and Punjab protested these delays, blaming the Centre for manipulative lending practices that led to borrowing from the Reserve Bank of India, adding yet more to state debt burdens. 

The annulment of the compensation cess after 2022 has sparked alarms of revenue losses — states have forecast such deficits that would undermine their fiscal status. This not only strained relations between governments it also revealed the deficiencies of the GST system aimed at achieving fiscal neutrality. More particularly, this has been the case when states less developed in their development depend upon centrally-supported finance. The structure and processes of the GST Council have fostered views that central dominance dominates and therefore contradict the spirit of cooperative federalism. With the central council holding one-third vote and a 75% majority to decide matters, as in an actual sense its veto power means that the Union can override state interests on serious matters like tax rates and exemptions. This caused difficulty in reaching a consensus on issues like the GST for petroleum products or the solution of the inter-state trade barrier which leads to inconsistent taxation rates and affects trade between states. Judicial interventions have reaffirmed the council's recommendatory function (see, for example, the Supreme Court decision in Union of India v. Mohit Minerals 2022), but in practice, such a Council was found to be overbearing by a central government and states saw it as a mechanism for coercive, rather than collaborative governance.

Conclusion

Ultimately, the post-GST reforms in India clearly helped to further tax governance by streamlining indirect taxation, better facilitating compliance mechanisms; ultimately fostering economic integration through the creation of a unified national market. This development, however, has fundamentally altered centre-state relations, often moving to one of centralization and coercive federalism (see Joseph & Kumary, 2023; Ratha, 2023), manifesting in states' diminished fiscal autonomy, reliance on central compensations, and a recurring regional disparity in revenue distribution. Although the GST Council embodies concerted efforts toward cooperative economic objectives, systemic biases (such as long payment times and exclusion of key commodities) present a need for rebalancing the Council to ensure fair power-sharing and revenue neutrality. In conclusion, while India's fiscal federalism is promising as a solution, future structural reforms should allow for more states making decisions, facilitate compliance from the different economic layers, and eliminate inter-state inequities to balance between national efficiency and subnational sovereignty to maintain long-run economic viability and growth (Chauhan & Jaiswal, 2025; Malagi & Walikar, 2025).

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