INTRODUCTION

"The introduction of a Goods and Services Tax (GST) in India in 2017 not only impacted the economy but it also
altered the contours of fiscal federalism in India.”
These are the words of Bibek Debroy, an economist serving as the Chairman of the Economic Advisory Council to the
Prime Minister of India.

Federalism can be understood as a division of powers between the Union and States. The Seventh Schedule of the
Constitution provides for three comprehensive lists dividing the subjects for legislative determination between the
Centre and the State governments, namely the Union list, the State list, and the Concurrent list. Fiscal federalism
refers to the division of responsibilities about public expenditure and taxation between the different levels of
government and defines the tenets of revenue sharing between the Centre and States.
With the advent of GST, the financial relationship between the central government and the states has been
significantly altered affecting the future course of fiscal federalism in India.

THE RELATIONSHIP BETWEEN GST AND FISCAL FEDERALISM

When the revenue and expenses of the government are not equal, it gives rise to fiscal imbalance. In India, the
Constitution recognizes the problem of fiscal imbalances and provides for the appointment of the Finance
Commission by the President of India every five years to resolve them by making recommendations on tax devolution
and grants in aid of revenues. Finance Commissions thus play a crucial role in shaping the fiscal federalism and
development trajectory of India.

With tax being the primary source of revenue for the government, the implementation of taxes has been instrumental
in achieving a fiscal balance in India. In order to maintain fiscal balance across various government bodies and states,
the proceeds of certain taxes are distributed among the Union and the states in a fair and equitable manner.

IMPLICATIONS
GST is an indirect tax that applies to the cost of certain goods and services sold domestically. It was designed keeping
in mind the idea of ‘one nation, one tax’. GST streamlined the taxation system by introducing a single tax rate for
goods and services and a unified tax administration.
It was a major step that affected the federal system of governance in India. Some of these implications are as follows:

Centralization of tax administration:

The implementation of GST has led to the centralization of tax administration. The GST is administered by the GST
Council, which comprises representatives from both the Union and State governments.

Union government's power to levy taxes:

GST has empowered the Union government to levy taxes on goods and services, which were previously under the
jurisdiction of the States.

States' role in decision-making:

Despite the centralization of tax administration, the States have been given a voice in the GST Council. This has
ensured their participation in the decision-making process, which has helped to maintain the federal character of
India.

Cooperative federalism:
GST has provided an opportunity for cooperative federalism in India. The GST Council comprises members from both
the Union and State governments, and decisions are made based on consensus. This has helped to promote
cooperative federalism in India.
Increase in revenue collection:
The implementation of GST has led to an increase in revenue collection for both the Union and State governments.
According to the MoF, the total revenue collected under GST in the financial year 2020-21 was Rs. 12.71 lakh crore.

Vertical distribution of revenue:

The implementation of GST has had an impact on the vertical distribution of revenue, as the GST revenue is shared
between the Union and States on the basis of the recommendations of the Finance Commission. (42% for states
currently)

Horizontal distribution of revenue:

The implementation of GST has also had an impact on the horizontal division of revenue among the States. The GST
revenue is distributed among the States based on rules that take into account the State's population, and other
factors. This has led to a more equitable distribution of revenue among the States.

Impact on small businesses:

The implementation of GST has had an impact on small businesses. Small businesses have to comply with the GST
regulations, which can be challenging. This has led to a reduction in the number of small businesses, which has had a
negative impact on revenue collection.

 This is called tax devolution.

CHALLENGES THREATENING THE FISCAL FEDERALISM

Critics of GST have argued that the regime will curtail fiscal federalism and hinder the state from pursuing its
independent ideologies in terms of the program it implements. The power of the States to raise revenue for problems
unique to them will also be hindered. It has come with its share of challenges, some of which are as follows:

Dominance of Union Government

Under Article 279A (9), any decision taken by the GST Council has to be passed by a majority of not less than 3/4th of
the members present and voting. The Union government has been bestowed with 1/3rd of the total votes and all other
states combined have been bestowed with 2/3rd of the total votes. By such a distribution of votes, the Union
government has indirectly been bestowed with a veto power over any deliberations with respect to the GST.

Coordination between Union and State governments:

GST is a concurrent subject, and both the Union and State governments have the power to levy taxes. The
implementation of GST required coordination between the Union and State governments. However, coordination
between the Union and State governments was a challenge during the initial phase of implementation, which led to
delays and confusion.

Implementation of technology infrastructure:

The implementation of GST required a robust technology infrastructure to ensure a smooth transition. The Goods
and Services Tax Network (GSTN) was established to provide the technology infrastructure for GST. However, the
GSTN faced several technical glitches during the initial phase of implementation, which led to delays and compliance
issues.

Multiple tax rates:

The GST system has multiple tax rates, which has led to confusion among taxpayers. The multiple tax rates have also
led to disputes between the Union and State governments over the classification of goods and services.

A POINT OF CONTENTION
At the time of the implementation of GST, the States showed remarkable cooperation willingly ceded most of their
taxation powers, and consented to surrender the existing multiple imposts that were accommodated within the GST
regime.
The Central government’s decision to stop the transfer of compensation to the states to cover the shortfall in state-
level Goods and Services Tax (GST) revenues relative to a projection that those revenues would grow at 14% per
annum from its base level in 2015-16. It was that projection and the promise of compensation that underpinned the
agreement to go ahead with the GST regime in 2017. With the Centre reneging on its promise, states are beginning
to see the folly of having ceded their independent taxation powers. If the federal system of governance must hold,
perhaps the GST must go.
Thus, the question of the federal structure being violated hangs over the GST regime as the rights of the states are
curtailed.

http://20.244.136.131/expert-speak/five-years-of-gst
All the states willingly ceded most of their taxation powers and consented to surrender the exiting multiple imposts
that got accommodated within the GST regime.
s it has been mandated by the GST Act, 2017, the states were supposed to receive the State GST (SGST) and a section
of Integrated GST (IGST). Apart from that, it was acknowledged that the process of transition in the new indirect taxes
regime could result in revenue shortfalls for the states and so it was unanimously decided that the losses incurred by
the states would be compensated from a pooled GST compensation fund for first five years, the period that ended in
June this year.
Fiscal federalism refers to the division of responsibilities with regard to public expenditure and taxation between the
different levels of government. It defines the tenets of revenue sharing between the Centre and States.
https://www.legalserviceindia.com/legal/article-11918-impact-of-goods-and-services-tax-on-indian-
federalism.html#:~:text=Increased%20revenue%20for%20State%20governments%3A&text=GST%20revenue%20is
%20shared%20between%20the%20Union%20and%20States%20based,infrastructure%20development%20and
%20other%20areas.

https://thewire.in/economy/india-gst-tax-states-centre-federalism

But the Central government under Prime Minister Narendra Modi and finance minister Nirmala Sitharaman has
decided to go ahead with its decision to stop the transfer of compensation to the states to cover the shortfall in
state-level Good and Services Tax (GST) revenues relative to a projection that those revenues would grow at 14%
per annum from its base level in 2015-16.
It was that projection and the promise of compensation which underpinned the agreement to go ahead with the
GST regime in 2017. With the Centre reneging on its promise, states are beginning to see the folly of having ceded
their independent taxation powers. If the federal system of governance must hold, perhaps the GST must go.

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ID=6680890001201050300900000010861031060200200590650370780001150890061051000060991100710221180
370010140050400680080750021201160720520210930090851060740911151091100760690260010160831021141
03027067085027119082074066118094086007077001094084110005112001021116&EXT=pdf&INDEX=TRUE

The core of this distribution can be found in the Seventh Schedule of the Constitution, which provides for three
comprehensive lists dividing the subjects for legislative determination between the Centre and the State
governments. These are the Union list, state list and concurrent list

The supporters of GST argue that the dual model of GST will help the states maintain their source of revenue for
implementation oftheir responsibilities under the federal structure.

Critics of GST have argued that the regime will curtail fiscal federalism and hinder the state to pursue their
independentideologies in terms of the program it implements.42 The power of the States to raise revenue for
problems unique to them will be hindered.

With the coming of GST, another unitary aspect has been added into the debatable federal structure of the
Constitution that would curtail state autonomy. The following two reasons can be attributed for such dominance of
the Union government:

Under Article 279A(9), any decision taken by the GST Council has to be passed by a majority of not less than 3/4th of
the members present and voting. Further, under sub-clause (a) & (b) of the same provision, the Union government
has been bestowed with 1/3rd of the total votes and all other states combined have been bestowed with 2/3rd of
the total votes. By such a distribution of votes, the Union government has indirectly been bestowed with a veto
power over any deliberations with respect to the GST as no decision can be passed without 3/4th majority, for which
the affirmation of the Union government becomes necessary. This clearly undermines State autonomy in deciding
their fiscal policy.

Secondly, if any issues arise out of the recommendations put forth by the GST Council, the power to establish a
mechanism to resolve such disputes has also been vested in the GST Council itself, which is in clear violation of the
principles of natural justice as it goes against the principle of nemo judex in causa sua, i.e., no- one should be a judge
in his own case.
These two issues with respect to the GST Council can directly impact the federal structure of India in general and the
fiscal distribution of powers in particular, and can act as obstacles for State governments to put forth their interests in
the GST Council.

The question of the federal structure being violated will also hang over the GST regime as the rights of the states are
curtailed. T

https://economictimes.indiatimes.com/news/economy/finance/gst-regime-altered-contours-of-fiscal-federalism-in-
india-debroy/articleshow/104404821.cms

"The introduction of a Goods and Services Tax (GST) in India in 2017 not only impacted the economy but it also altered the contours of fiscal
federalism in India.

"Amongst others, the steady growth of GST revenue has been a robust barometer of the success of the reform," he said.
Bibek Debroy is an Indian economist, serving as the chairman of the Economic Advisory Council to the Prime
Minister of India.