Goods and services tax and its implications for fiscal federalism in India

Abstract

This paper analyses the effects of the Goods and Services Tax (GST) on fiscal federalism in India, focusing on the changing financial relationship between the central and State governments. Before GST was introduced, states had more control over raising revenue through indirect taxes like Value Added Tax (VAT). With the introduction of GST in 2017, many state and central taxes were combined, leading to a shift in the balance of power by centralizing indirect taxes. The paper examines how this change has reduced states’ financial independence, discusses the GST Council’s role, and highlights states’ revenue-generating difficulties. It also looks into issues related to revenue sharing, the increased central control over fiscal matters, and the impact of GST on cooperative federalism. The study emphasizes balancing central control and maintaining states’ fiscal independence while benefiting from a unified tax system.