Policy Governance and Federal Structure in India: An Analysis of GST Reform

Abstract This article seeks to explore how policy governance and India’s federal system interact as shaped by the Goods and Services Tax (GST) reform in 2017. As a game-changing reform of India’s red tape, GST sought to integrate India’s patchwork tax ecosystem and consolidate state- and central-level levies into a single, nationwide tax system. This change has enormous implications for federalism, that of balancing cooperative system of governance with the independence of states, in an increasingly diverse, multi-layered democracy. The analysis examines how GST reorganizes power structures between the Union and states. The centralisation of tax administration under GST Council - a partnership-based institution consisting of both central and state representatives - contributes to consensus based decision-making but it also presents the specter of encroachment on state fiscal rights. Main issues addressed are: harmonization of tax rates, revenue sharing arrangements and compliance issues – manifestations of strains in the vertical as well as horizontal federal relations. The study assesses the efficacy of GST as a means of increasing economic efficiency while at the same time reducing tax cascading and creating a common market while highlighting such criticisms as the long times involved in providing compensation to states and the centralization of influence in the council's deliberations. Based on institutional and political economy frameworks, this article contends that GST is reflective of adaptive federalism, in which policy innovation promotes national integration but requires safeguards for regional equity. In the end, it argues that good governance in the Indian governance structure has to be an ongoing dialogue between state legislators, and institutional design reforms must ensure and redress asymmetric relations. The research underscored GST's potential to provide a blueprint for some future policy experiments, and underlined the need for inclusive mechanisms at all levels to preserve national harmony through economic changes. Key Words: Governance, Policy, GST Federalism 1.The Federal Structure of India and Policy Governance: Indian federal structure as defined in the 1950 Constitution of India combines a centralized authority with a stately autonomy, which has been referred to as "quasi-federal" or cooperative federalism. Whereas in classical federations, states are independent, as in the case of the United States, Article 1 of the Constitution of India calls for the system to be a "Union of States" because, while the sovereignty of the constituent states is not inherent, all powers are exercised via three lists -- one for each state: from the Union (exclusive to the Centre, covering national matters such as defense and foreign affairs), from the State (exclusive to states including police and agriculture) and from the Concurrent List (shared jurisdiction). Given the immense linguistic, cultural, and regional diversity in India, this framework embraces, at one remove, regional and regional cohesion, and is anchored on an overall national identity — especially against a backdrop of past challenges such as partition, as well as colonial legacies (Kumar hence cooperation between people. This need to maintain constitutional balance, together with better governance effectiveness when dealing with an increasingly complicated socio-economic environment is ensured through further reform as the polity develops; this can be achieved through dialogic approaches, fiscal justice and institutional guardrails. 2.Background and Features of the GST Reform: The reform of Goods and Services Tax (GST) in India has undergone one of the most major developments in indirect taxes since independence to facilitate this single, destination-based consumption tax to replace an increasingly fragmented tax system. GST idea and guidance was the result of recommendations of Kelkar Task Force on indirect taxes in 2000, by which the multi-tax system was proposed to be gradually updated to become one, where compliance, tax evasion and economic integration might be effectively improved (Goods and Services Tax Council, n.d.). Later actions led, for instance, to the Empowered Committee of State Finance Ministers issuing a First Discussion Paper in 2009, followed by the Constitution (115th Amendment) Bill proposed by the United Progressive Alliance government in 2011. This bill lapsed in 2014 but came back in 2014 as the Constitution (122nd Amendment) Bill, which was subsequently re-passed as the Constitution (One Hundred and First Amendment) Act, 2016 (ClearTax, 2025a; Wikipedia, n.d.). Article 246A was included in the amendment, empowering the Centre and States to jointly tax supplies of goods and services; and Article 279A designated the GST Council as a constitutional authority for a decision-making body and collaborative approach. GST took effect on 1 July 2017 after ratification by more than half the respective state legislatures and subsequent enactment of legislation from the Central Goods and Services Tax (CGST) Act through Integrated Goods and Services Tax (IGST) Act, State Goods and Services Tax (SGST) Acts, Union Territory Goods and Services Tax (UTGST) Act and the GST (Compensation to States) Act, 2017 (ClearTax, 2025b; Department of Revenue, n.d.). This was a rollout on 17 all - central and state indirect taxes namely: central excise duty, service tax, value-added tax (VAT), central sales tax, entry tax and many other cesses; excluding alcohol for human consumption and, from the beginning, petroleum products such as crude oil, petrol, diesel, natural gas, and aviation turbine fuel. That reform transitioned taxation from a source to a destination-based system, making sure that the money flows to the paying state and breaking down interstate tax barriers to create a single national market. One feature of India's GST is its two-tier structure, which is compatible with the national government since the Centre and both States can have the same transaction tax (ClearTax, 2025c). Under the structure, supplies from within states attract CGST (levied and collected by the Centre) and SGST (levied and collected by their respective State), while inter-state supplies attract IGST (levied and collected by the Centre and revenue distributed to destination State). For the Union Territories that do not have legislatures, UTGST applies together with CGST. This two-pronged approach maintains fiscal independence for States while providing uninterrupted input tax credit (ITC) through entire supply chain, reducing the cascade effect of taxes (Canara HSBC Life, n.d.). The GST