Fiscal Federalism and Centre–State Power Dynamics after GST: Implications for Policy Governance in India

Abstract Among the defining fiscal milestones of post-independence India, the nationwide rollout of the Goods and Services Tax (GST) in July 2017 stands as a structural turning point in the architecture of indirect taxation. The reform dismantled a layered system of overlapping central and state levies — encompassing excise duty, service tax, value-added tax, and entry tax, among others — and replaced them with a destination-based, multi-tier tax applicable uniformly across the country. The stated goals of the transition were both economic and administrative: to eliminate the cascading burden of taxes embedded in supply chains, to reduce transaction costs arising from interstate fiscal barriers, to broaden the formal taxpayer base, and to foster a more transparent and accountable system of revenue collection. This paper undertakes a systematic inquiry into how well these goals have been realised, and at what institutional cost to the constitutional principles of fiscal federalism. A central analytical focus of the paper is the GST Council, constituted under Article 279A of the Constitution as a joint deliberative body comprising the Union Finance Minister and the finance ministers of all states. This institution represents an innovation in Indian federal governance: for the first time, a constitutional forum was created in which sub-national governments collectively hold voting power exceeding that of the Union government, enabling negotiated consensus on national tax policy. The paper evaluates both the promise and the limitations of this design, examining whether the Council has functioned as a genuine platform for cooperative governance or whether structural asymmetries — in administrative capacity, fiscal dependency, and agenda-setting authority — have tempered its federal character. Methodologically, the study draws on qualitative policy analysis informed by secondary sources including GST Council communiqués, Union and State budget documents, Finance Commission reports, Economic Survey data, and peer-reviewed scholarship in public finance and federalism studies. Sector-wise analysis covers manufacturing, where input tax credit availability has altered cost structures; the services industry, where definitional integration has reduced compliance duplication; the logistics sector, where the removal of inter-state checkposts has materially lowered transit times; and micro, small, and medium enterprises, whose formalisation trajectory under GST has been uneven and contested. The findings affirm that GST has generated measurable improvements in market integration, tax transparency, and revenue buoyancy over time. Simultaneously, the analysis identifies persistent structural challenges: the complexity of a five-rate schedule prone to classification disputes, the inadequacy of the transitional compensation mechanism for revenue-losing states, the administrative asymmetry between large and small states, and the compliance burden disproportionately borne by small businesses. The paper concludes that the long-term dividends of GST — for growth, for equity, and for federal governance — are contingent not merely on the reform’s technical architecture but on the quality of institutions and political will brought to bear on its ongoing evolution. Strengthening institutional coordination, simplifying tax structures, and enhancing digital governance mechanisms will be crucial for maximising the long-term benefits of GST reforms and sustaining India’s economic growth trajectory. Keywords: Goods and Services Tax, Fiscal Federalism, Cooperative Federalism, Policy Governance, Economic Reforms, Tax Administration, Centre–State Relations, Economic Growth, India 1.Introduction Taxation is among the most consequential instruments of economic governance available to modern states. In federal polities, where fiscal powers are constitutionally distributed across multiple tiers of government, the design of the tax system carries implications that extend beyond revenue adequacy to encompass intergovernmental equity, economic efficiency, and the functional health of federal institutions. India’s pre-2017 indirect tax architecture was a textbook illustration of the pathologies that can afflict federal tax systems over time: fragmented jurisdiction, cascading levies, inter-state price distortions, and a compliance landscape that imposed disproportionate costs on businesses of all scales. The 101st Constitutional Amendment Act of 2016, and the concurrent GST legislation that came into force on 1 July 2017, sought to address these pathologies comprehensively. By subsuming central and state taxes within a single value-added framework and establishing the GST Council as a constitutionally mandated inter-governmental deliberative body, the reform simultaneously restructured India’s tax system and its federal governance architecture. The two dimensions — fiscal and federal — are analytically inseparable: the long-run success of GST as an economic reform depends on the quality of the intergovernmental institutions through which its policies are continuously updated, negotiated, and administered. This paper examines both dimensions. It traces the economic impact of GST across key productive sectors, evaluates the institutional functioning of the GST Council as an instrument of cooperative federalism, identifies the governance challenges that have accompanied implementation, and develops policy-oriented conclusions about the institutional reforms needed to strengthen the reform’s long-term contribution to India’s growth trajectory. 2.Need for the Study The academic and policy literature on GST has expanded considerably since 2017, yet several dimensions of the reform remain under-examined. First, the relationship between the design of the GST Council and the quality of cooperative federalism in practice has received less systematic attention than the revenue implications of the reform. Second, sectoral analyses of GST’s economic effects have tended to focus on large, organised-sector firms, with comparatively limited attention to MSMEs and informal traders. Third, the governance implications of the reform’s digital infrastructure — the GSTN portal, e-invoicing, the e-way bill system — for state administrative capacity and taxpayer compliance behaviour merit deeper inquiry. This study addresses these gaps by combining institutional analysis of the GST Council with sector-wise economic assessment and a governance-oriented evaluation of implementation challenges. The aim is to generate an integrated account of GST’s performance that is useful both to academic researchers in political science and public finance and to policymakers engaged with the reform’s next generation of challenges. 3. Objectives of the Study To examine the role of GST reforms in shaping India’s economic growth trajectory across key productive sectors. To analyse the institutional functioning of the GST Council as a mechanism of cooperative federalism and shared policy governance. To evaluate the implications of GST for the fiscal autonomy of State governments and the constitutional balance of Centre–State relations. To identify structural, administrative, and political challenges that have constrained the effectiveness of GST implementation. To propose evidence-based policy recommendations for strengthening GST governance and advancing fiscal federalism in India. 4. Hypothesis H₁: GST reforms have strengthened economic integration and improved tax efficiency in India by eliminating cascading levies, reducing inter-state trade barriers, and expanding the formal taxpayer base. H₂: GST has enhanced cooperative federalism by institutionalising policy coordination between the Union and State governments through the GST Council, while simultaneously introducing new tensions around fiscal autonomy and revenue distribution. 5. Methodology The research employs a qualitative, interpretive methodology grounded in secondary data analysis. Institutional analysis is used to examine the GST Council’s design, decision-making processes, and governance outputs, while comparative policy analysis maps the differential economic effects of the GST framework across sectors with distinct compliance profiles, market structures, and formalisation levels. Analytical conclusions are drawn from official and peer-reviewed sources. Data sources consulted include: GST Council communiqués, meeting agenda documents, and official press releases (2017–2024) Union and State government budget documents and revenue receipt statements Finance Commission of India publications, including Fifteenth Finance Commission reports Economic Survey of India and Reserve Bank of India annual publications Working papers from NIPFP, ICRIER, World Bank, and IMF on Indian fiscal federalism and GST Peer-reviewed articles from journals of public finance, political science, and administrative studies 6. Data Analysis Analysis of GST revenue data and policy outcomes across the reform’s first seven years reveals several analytically significant patterns. The most visible trend is the sustained growth in aggregate GST collections. From a partial-year total of approximately ₹7.19 lakh crore in 2017–18, annual collections rose to over ₹22 lakh crore by 2024–25, with average monthly collections exceeding ₹1.84 lakh crore. A temporary contraction in 2020–21, attributable to the pandemic-induced economic disruption, was followed by a sharp recovery that has continued uninterrupted. This revenue trajectory reflects improved taxpayer compliance, the maturation of digital filing infrastructure, and the gradual expansion of the formal economy. A second observation concerns the compliance architecture. The shift from paper-based to digital tax administration has materially improved the audit trail available to tax authorities, reducing opportunities for invoice fraud and evasi