GST and Federalism

The multiplicity of taxes at the state and central levels resulted in a complex indirect tax structure in the country that is ridden with hidden costs for trade and industry. It is to simplify this very indirect tax structure that the government has attempted several tax policy reforms at different points of time. This objective furthered the idea of ‘One Nation One Tax’ and the introduction of Goods and Services Tax (GST) into the financial system. The passing of GST is seen by many as a great leap forward towards achieving economic integration of the Country. GST is one indirect tax for the whole nation, which will make India one unified common market. It is a single tax on the supply of goods and services, from the manufacturer to the consumer. It is essentially tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

Many have opined that the GST would effectively be a death knell for federalism in the country. The main concerns in this regard are as follows:

  1. States could lose control over financial autonomy due to GST council being a constitutional body controlling taxpayers.
  2. Loss of revenue: the demonetization move resulted in loss of states revenue which needs to be compensated.
  3. Administrative issues: As to who would have control over taxpayers having less than Rs.1.50 crore annual revenue

The GST Council consists of Union Finance Minister (Chairman), Union Minister of State in charge Finance, and a Minister nominated by each State government. All decisions of the GST Council are made by 3/4th majority of the votes, the centre shall have 1/3rd of the votes and the states together have 2/3rd of the votes. Many critics of are apprehensive of this power of central government and worry that it might have an upper hand in many deliberations of the council.

However counter arguments to these criticisms suggest otherwise. With regard to loss of revenue, as far as loss of revenue to the states, Article 18 of the Act of 2016, provides for compensation to the States for loss for a period of five years. Administrative challenges can be overcome if the states receive revenue that they were receiving.

The Goods and Service Tax is among the most significant reforms since liberalization commenced in 1991. It embodies ‘one economic India’ which is expected to lead to a more productive economy. It was also brought in with an aim to lead to macroeconomic gains. The GST council serves as an example of mutual cooperation among the centre and the states irrespective of party affiliations. Despite scepticism, so far it does not appear the concept of cooperative federalism has been compromised because of GST. Many hope that it will be implemented in the same spirit here onwards as well for it could also be viewed as a leading example for the future of cooperative federalism as a whole.

Categories: India

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