Goods and Services Tax and State Fiscal Autonomy in India: An Empirical and Econometric Assessment of Centre–State Financial Relations, Revenue Dependence and Cooperative Fiscal Federalism

Abstract

The introduction of the Goods and Services Tax (GST) in India in July 2017 represents one of the most significant transformations in the country's fiscal federal structure. By subsuming several Union and State indirect taxes within a dual GST framework, the reform sought to create a common national market, improve tax compliance, reduce cascading and strengthen revenue mobilisation. At the same time, GST altered the independent taxation powers previously available to State governments, raising important questions concerning State fiscal autonomy and Centre–State financial relations. The present study critically examines the relationship between GST and State fiscal autonomy in India using a quantitative, longitudinal and panel-data research design. State-level fiscal data covering the pre-GST and post-GST periods are analysed through descriptive statistics, pre- and post-GST comparison, correlation analysis, multiple regression, fixed-effects panel regression, Hausman specification testing and Difference-in-Differences analysis. Fiscal autonomy is assessed through own-revenue mobilisation, own-tax revenue, non-GST taxation, GST revenue, Union transfers, grants and related fiscal indicators. The analysis distinguishes between fiscal capacity, represented by the ability to generate revenue, and fiscal discretion, represented by the ability to independently determine revenue policies. The findings indicate that GST has contributed positively to State revenue mobilisation, particularly through SGST, while simultaneously reducing the relative importance of several independently controlled indirect-tax instruments. The analysis also indicates considerable variation among States in fiscal autonomy and dependence on Union transfers. Regression results suggest that non-GST own-tax revenue and economic capacity are important positive determinants of fiscal autonomy, whereas dependence on Union transfers, grants, fiscal deficits and outstanding liabilities are negatively associated with fiscal autonomy. The study concludes that GST has created a complex trade-off between tax harmonisation and State fiscal discretion. Strengthening cooperative fiscal federalism therefore requires predictable revenue sharing, greater transparency in intergovernmental transfers and adequate fiscal space for States while preserving the efficiency benefits of a unified GST system.