Reimagining Indian Federalism in the Post-GST Era: A Juridical and Policy Analysis of Centre-State Relations
- Lets Learn Law
- Jun 22
- 3 min read
Abstract
The Goods and Services Tax (GST) introduced in 2017 redefined the contours of Indian federalism. While promoting a unified tax system, it also challenged the fiscal autonomy of States. This article explores the legal, political, and constitutional implications of GST on Centre-State relations, using case law, expert views, and constitutional provisions.
Introduction
Indian federalism has long been characterized by a unique mix of central authority and regional autonomy. Dr. B.R. Ambedkar described the Constitution as "both unitary as well as federal according to the requirements of time and circumstances." The introduction of GST fundamentally altered this structure by consolidating indirect taxes under a central mechanism.
I. Constitutional Framework
Federalism in India is defined under Part XI and Part XII of the Constitution, especially through the Seventh Schedule, which divides powers between the Union and the States. Prior to GST, States had more autonomy over indirect taxes like VAT, excise, and entertainment tax. The adoption of GST led to the formation of the GST Council under Article 279A of the Constitution, reducing the fiscal autonomy of States.
II. GST: Structural and Fiscal Reorientation
GST operates under a dual model: Central GST (CGST), State GST (SGST), and Integrated GST (IGST). While CGST and SGST are applied concurrently on intra-state transactions, IGST is levied on inter-state supplies and apportioned by the Centre. The new regime replaced 17 taxes and 23 cesses, reducing State control over fiscal policy.
The GST Council, composed of Union and State finance ministers, functions on a three-fourths majority. The Centre controls one-third of the votes, while all States together have two-thirds. Although meant to foster cooperative federalism, the decision-making structure has drawn criticism for favouring the Centre.
III. Centre-State Tensions and Compensation Challenges
One of the critical stress points in GST implementation has been compensation payments. During the COVID-19 crisis, the Centre claimed an inability to meet shortfall obligations under the Compensation to States Act, 2017. This led to a political standoff, with several States objecting to the Centre’s suggestion that they borrow from the market to meet the deficit.
IV. Judicial Interpretation
The Supreme Court has played a key role in interpreting GST's implications:
1. Union of India v. Mohit Minerals Pvt. Ltd. (2022): The Court ruled that the GST Council’s recommendations are not binding, preserving the constitutional autonomy of States.
2. State of Rajasthan v. Union of India (1977): Reinforced the idea that cooperative federalism cannot override constitutional balance.
3. K.T. Plantation Pvt. Ltd. v. State of Karnataka (2011): Upheld the States’ right to taxation within constitutional parameters.
These decisions emphasize that even in a centralized tax regime, the foundational principles of federalism must be preserved.
V. Expert Views and Policy Discourse
Policy experts have raised alarms over central overreach:
Y.V. Reddy argued that GST weakens State capacity and violates the federal spirit enshrined in the Constitution.
The Fifteenth Finance Commission noted the need for equitable and transparent compensation mechanisms.
The CAG Report (2021) highlighted anomalies in GST settlement and reconciliation.
These assessments collectively underscore the need for reforms to restore fiscal balance.
VII. Reform and the Way Forward
To strengthen Indian federalism post-GST, the following reforms are necessary:
Revising the GST Council voting structure to reflect a more equitable federal balance.
Empowering States with diversified revenue options, including environmental and digital taxes.
As Niranjan Rajadhyaksha notes, “Federalism is not just about power-sharing, but trust-building.”
Conclusion
While GST has unified India's tax regime, it has also strained federal relations. Legal interpretations and scholarly critiques emphasize the importance of preserving State autonomy within a centralized tax structure. A balanced, cooperative, and transparent federal model is key to India’s democratic and economic future.
Sources
This article is authored by Swastika Singh. She was among the Top 40 performers in the Quiz Competition on Mergers and Acquisitions organized by Lets Learn Law.
Comments