The Goods and Services Tax (GST), introduced in India in 2017, marked a monumental reform in the country's indirect tax regime. While it brought significant economic benefits, it also fundamentally altered the financial relationship between the Union and State governments, particularly concerning the states' fiscal autonomy.

Economic Benefits of GST:

1. Simplification and Uniformity: GST replaced a plethora of central and state indirect taxes (like excise duty, service tax, VAT, entertainment tax, luxury tax) with a single, unified tax. This simplified the tax structure and created a 'One Nation, One Tax' regime.
2. Elimination of Cascading Effect: By allowing seamless input tax credit across the value chain, GST eliminated the 'tax on tax' effect, making goods and services potentially cheaper and improving competitiveness.
3. Increased Tax Base and Compliance: The digital platform, self-policing mechanism of input tax credit, and broader coverage have led to an expansion of the tax base and improved tax compliance.
4. Ease of Doing Business: A uniform tax structure across states reduced logistical complexities and compliance burdens for businesses operating nationwide, fostering a common national market.
5. Boost to GDP: By improving efficiency and reducing costs, GST was expected to contribute to higher economic growth.

Compromise on States' Inherent Right to Impose Taxes:

1. Loss of Fiscal Autonomy: Prior to GST, states had the power to levy various taxes like VAT, sales tax, entertainment tax, and luxury tax. With GST, these powers were subsumed, significantly curtailing states' independent ability to raise revenue through indirect taxation.
2. Dependence on GST Council: Decisions regarding tax rates, exemptions, and administrative procedures under GST are made by the GST Council, a joint forum of the Union and State governments. While states have representation, the Union government holds a one-third voting weight, giving it significant influence. This means states cannot unilaterally alter tax policies or rates for goods and services covered under GST.
3. Revenue Uncertainty: States initially feared revenue losses due to the transition. To address this, a compensation mechanism was put in place for five years (until 2022), guaranteeing states a 14% annual growth in their GST revenue. Post-compensation, states are more exposed to fluctuations in GST collections and the decisions of the GST Council, potentially impacting their fiscal planning.

Changing Nature of Union-State Financial Relations:

1. Shift Towards Centralization of Indirect Tax Powers: GST represents a significant centralization of indirect tax powers, moving away from a system where both levels of government had distinct and independent domains of indirect taxation.
2. Emergence of Cooperative Federalism (GST Council): The GST Council is a unique constitutional body that embodies cooperative federalism. It mandates joint decision-making between the Union and states on critical fiscal matters. This institutionalized cooperation is a new dimension in India's federal structure.
3. Increased Interdependence: States' fiscal health is now more directly linked to the overall performance of GST and the decisions taken by the GST Council. Their ability to fund state-specific welfare schemes or infrastructure projects is more dependent on their share of GST revenue and central transfers.
4. Focus on Direct Taxes and Non-Tax Revenue: With reduced flexibility in indirect taxes, states might increasingly look towards direct taxes (e.g., property tax, professional tax) and non-tax revenues (e.g., user charges, fees) to augment their own resources.
5. Impact on State-Specific Economic Policies: States have less room to use indirect tax incentives or disincentives to promote specific industries or influence consumption patterns within their borders, as tax rates are uniform across the country.

Conclusion: GST has undoubtedly streamlined India's indirect tax system and brought economic efficiencies. However, it has fundamentally reshaped Union-State financial relations by centralizing indirect tax powers and diminishing the states' independent fiscal space. While the GST Council promotes cooperative federalism, it also highlights the increased interdependence and, arguably, the reduced autonomy of states in revenue generation. This shift necessitates a continuous dialogue and robust mechanisms within the GST Council to balance national economic objectives with the fiscal needs and autonomy of individual states.