Goods and Services Tax represents a structural reform in India's indirect tax architecture. Examine its significance for fiscal federalism and the challenges that remain in realisi

GS3 Indian-Economy
Goods and Services Tax represents a structural reform in India's indirect tax architecture. Examine its significance for fiscal federalism and the challenges that remain in realising its full potential.

Examine

  • 10 marks
  • 8 min
  • 150 words
  • Medium

The Hindu

Read article →

GST as a Structural Reform

  • The 101st Constitutional Amendment (2016) subsumed ~17 indirect taxes into a unified GST, eliminating cascading and creating a common market.
  • The GST Council (Art. 279A) institutionalises cooperative federalism through joint decision-making.

Significance for Fiscal Federalism

  • Shared Tax Sovereignty Concurrent taxing powers (Centre + States) mark a shift from fragmented authority to pooled sovereignty.
  • Revenue Buoyancy & Formalisation Rising collections (e.g., ₹2.4+ lakh crore, April 2026) reflect improved compliance and digitisation (e-way bills, e-invoicing).
  • Compensation Mechanism The GST (Compensation to States) Act, 2017 assured 14% growth, cushioning States during transition and strengthening trust.
  • Institutional Dialogue The Council enables continuous negotiation, embodying “cooperative, not coercive federalism” (15th Finance Commission observations).

Challenges in Realising Full Potential

  • Narrow Tax Base Key items like petroleum, alcohol, electricity remain outside GST, limiting input tax credit (ITC) chains.
  • Rate Complexity Multiple slabs (0–28%) dilute simplicity and create classification disputes (RNR debate—Arvind Subramanian Committee).
  • Compliance Burden & Fraud MSMEs face filing complexity; fake ITC claims challenge enforcement.
  • Post-Compensation Stress Since 2022, States face revenue uncertainty, reviving concerns over fiscal autonomy.
  • Council Functioning Issues Voting asymmetry (Centre 1/3 weight) and occasional disagreements raise questions on balance (Mohit Minerals, 2022: Council recommendations not binding).

Conclusion

  • GST has reconfigured fiscal federalism, enhancing coordination and efficiency, but remains work in progress.
  • GST 2.0 should prioritise base broadening (petroleum inclusion), rate rationalisation (2–3 slabs), robust IT systems, and predictable revenue frameworks to fully realise its transformative potential.