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 fisc