FISCAL FEDERALISM IN THE GST ERA: CHALLENGES AND THE ROAD AHEAD

Abstract

The introduction of the Goods and Services Tax in 2017 was a historic event for India’s tax structure, as it sought to unify the diverse and multi-layered system of indirect taxes, associated with the slogan ‘One Nation One Tax’. While GST has created an integrated approach to taxation, it has also triggered a distortion in India’s fiscal federalism equilibrium by concentrating power in the hands of the central government. In the past, the Indian Constitution permitted a federal model of finance where the Centre and states had broad legislative powers for taxation as outlined in the Seventh Schedule. The introduction of the GST, enabled by the 101st Constitutional Amendment Act, consolidated numerous state taxes into a single GST collection, stripping the states of their autonomous tax-raising capacity. For operational reasons, the Union government has adopted strategies typically reserved for the states; now, authorities wield significant power due to the weighted voting system within the GST Council, where the Union government predominantly influences policy decisions. This paper analyses how the current GST regime has increased the dependence of states on the central government and restructured the depiction of India’s federal system, as well as its centralisation. The most urgent of these issues has been the GST compensation cess, particularly the delay from the Centre in transferring funds to states that was distinctly prevalent during the fiscal tremors accompanying the COVID-19 pandemic. This reduced autonomy of states due to the dependence on the Centre for revenue flows has drastically reduced the financial flexibility of the states, preventing them from providing adequate financing to meet their welfare expenditures and development activities that are regionally distinct. This paper recommends restructuring the fiscal federalism of India in the context of GST to provide a more even distribution of authority.