SC says Centre, States have equal powers to make GST-related laws
30th May, 2022
- The apex court ruling
- GST Council
- Achievements of GST Regime
- Challenges that remains
- Reforms needed
- What is cooperative federalism?
- Cooperative Federalism in India
- Fault lines in the Indian model of Federalism
- How to strengthen federalism in India?
The Supreme Court, emphasising on the importance of “cooperative federalism” for the well-being of democracy, held that Union and State legislatures have “equal, simultaneous and unique powers” to make laws on Goods and Services Tax (GST) and the recommendations of the GST Council are not binding on them.
- The participation of all States and Centre in the framing of GST laws has led to the strengthening of spirit of cooperative federalism.
- Constitution still provides room for states to levy tariff and non-tariff barriers.
- Article 302 gives Parliament the power to restrict free trade between and within states on grounds of public interest.
- Similarly, Article 304 (b) allows state legislatures to restrict trade and commerce on grounds of public interest.
- The gist of these provisions is that both the Centre and the States have considerable freedom to restrict trade and commerce that hinder the creation of one India.
The apex court ruling
- Article 246A of the Indian Constitution treats the Union and the States as equal units, conferring a simultaneous power (on Union and States) for enacting laws on GST.
- Article 279A (constituting the GST Council) envisions that neither the Centre nor the states are actually dependent on the other.
- The recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the states.
- They are recommendatory in nature and only have a persuasive value.To regard them as binding would disrupt the fiscal federalism.GST Council
- The Council consists of the Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government.
- All decisions of the GST Council will be made by three-fourth majority of the votes cast; the centre shall have one-third of the votes cast, and the states together shall have two-third of the votes cast.
The GST Council makes recommendations on:
- Taxes, cesses, and surcharges to be subsumed under the GST,
- Goods and services which may be subject to, or exempt from GST,
- The threshold limit of turnover for application of GST,
- Rates of GST,
- Model GST laws, principles of levy, apportionment of IGST and principles related to place of supply,
- Special provisions with respect to the eight north eastern states, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand and other related matters.
Taxes Subsumed Under GST
At the Central level, the following taxes are subsumed:
- · Central Excise Duty,
- · Additional Excise Duty,
- · Service Tax,
- · Additional Customs Duty commonly known as Countervailing Duty, and
- · Special Additional Duty of Customs.
At the State level, the following taxes are subsumed:
- · Subsuming of State Value Added Tax/Sales Tax,
- · Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States),
- · Octroi and Entry tax,
- · Purchase Tax,
- · Luxury tax, and
- · Taxes on lottery, betting and gambling.
Achievements of GST Regime
- Abolition of interstate check-posts has reduced the impediments to the interstate movement of goods and helped create a national common market.
- It is estimated that the long-distance travel time for goods transportation has reduced by almost 20%.
- The reform has also improved supply- chain management.
- The abolition of interstate sales tax has made the tax destination-based and reduced inequitable interstate tax exportation.
- Compliance mechanisms have improved due to linkage and exchange of information between income-tax and GST departments.
- Cascading (tax on tax) has reduced due to more a comprehensive mechanism to credit input taxes against the taxes on outputs.
- Creation of GST Council is an important innovation in cooperative federalism. It has helped minimize the transaction cost of formulating domestic consumption taxes of the Centre and states.
Challenges that remains
- GST implemented in India has a number of shortcomings which have resulted in erosion of the base and continued distortions: large list of exemptions, multiplicity of rates, exclusion of several items of consumption from the base.
- Multiplicity of tax rates enhance administration and compliance costs, enable misclassification, and cause distortions and in some cases cause inverted duty structure.
- Rates have been varied set according to use of the product and value of the product.
- Items considered as inputs are taxed lower as compared to those judged as outputs.
- High tax rates on automobiles, building and construction material at a time when demand conditions are already weak has caused further slowdown in these sectors.
- By excluding petroleum products, real estate and electricity, 40% of the internal indirect taxes at the Centre as well as states are not in the net.
- The dysfunctional GST technology platform has resulted in arbitrary integrated GST allocation and has caused delays in refunds to the exporters.
- Given that GST comprises nearly 60% of tax revenues of states, falling revenues and default in GST compensation is bringing activities of the States to halt.
- While the Centre has more fiscal manoeuvring space, the decline in tax revenue growth is impacting state cap-ex more directly.States are facing pressure on fiscals, some already resorting to ways and means and even overdrafts.
- State governments have curbed their capital expenditure, a move which will further delay the revival of private investment cycle.Given that roughly two-thirds of the general government cap-ex is contributed by states, the slashing of cap-ex by states can deepen economic slowdown.
- Simplify and Rationalise: The full potential of GST reform depends upon further simplification and rationalization.
- Improve tech platform: In order to improve revenue performance GST council must stabilize the technology platform.
- Reduce multiplicity of rates: Reducing the number of tax rates should begin by getting rid of the 28% category altogether and transferring them to the 18% slab.At a lower rate, the turnover would be higher due to increased demand and the loss of revenue will be lower.
- Reducing exempted list: The list of exempted goods and services should be pruned. Only those that are difficult to tax for administrative reasons should be exempted and many of the items under 5% should be moved to 12%.
- GST on petroleum:There is need to include the petroleum products and electricity in the GST base.Petroleum products contribute about 42% of the revenue from domestic indirect taxes and including it will ensure competitiveness.
- Standard GST rate: In the next stage, the 12% and 18% categories can also be merged at 15% (or a 14-16% range). This will simplify the tax system.Varying rates as per use and value of the products, rate differentiation for the same group of commodities and rate differences based on the stage of production should be eliminated.
- States’ involvement: Onus of fixing GST should not just be central government’s job; states should also focus on the ground issues instead of only focusing on getting compensation.
- Checking ITC frauds: In order to avert input tax credit (ITC) frauds there is need for increasing development of business intelligence systems to detect such frauds, and setting up dedicated units in each state.
What is cooperative federalism?
Cooperative federalism (marble-cake federalism), is defined as a flexible relationship between the federal and state governments in which both work together on a variety of issues and programs for larger public interest.
Cooperative Federalism in India
- Schedule 7: Schedule 7 of the Indian Constitution provides strict delineation of powers between centre and state whereas centre and state cooperates on concurrent list.
- Zonal Council: Zonal Councils provide an excellent forum where irritants between Centre and States and amongst States can be resolved through free and frank discussions and consultations.
- GST Council:Passing of GST is a shining example of cooperative federalism where States and Centre have ceded their power to tax and come up with a single tax system to realize the dream of one Economic India with ‘One Nation, One Market’.
- NITI Aayog: The institution provides the central and state governments with relevant strategic and technical advice across the spectrum on key policy elements. It promotes bottom-up approach to development planning.
- SabkaSaathSabkaVikas: involves State’s as equal partners of development. There is a move towards competitive and cooperative federalism.
Fault lines in the Indian model of Federalism
- Ambiguity in distribution of Subjects: At the time of making of the constitution there was no guiding principle that clarified the position as to why an item was placed in the Union, concurrent or state lists. And once the item was placed under a list, there has been little adherence to it. For example, while health is an entry under state list, union government undertakes various initiatives in health.
- Tussles between the agencies: Conflict between agencies of central government and state government stress cohesive functioning of centre and states.
- Overbearing interference: Institutions like the Supreme Court, RBI, CBI, Election Commission, and academic institutions are pillars of the republic. Overbearing interference in their functioning can disturb their autonomy and create centralist tendencies.
- Emergency provisions: Existence of emergency provisions in the constitution, though placed as a safeguard, if misused, can amount to centralisation of power.
- Inter-state water dispute: Role given by the Constitution to the Centre in regard to inter-state rivers has not been made much use of to devise effective conflict resolution mechanisms.
How to strengthen federalism in India?
- It is important to have a clear division of labour, functions, responsibilities and regulatory role of various levels of governments.
- There is need to re-look and redistribute entries in the Seventh Schedule.
- The principle of subsidiarity can be used as a relevant guiding principle Which states, what can be done best (with minimum transaction and coordination costs) at a particular level should be done at that level and not at a higher level or lower level. This approach could be the most optimal.
- Sarkaria Commission Recommendation: Union government must consult the states before legislating on items in the concurrent list.
- Punchhi Commission Recommendation: Greater flexibility to states in relation to subjects in the state list and ‘transferred items’ in the concurrent list.
- Lessons can be learnt from Kerala which realised the operational difficulties in 73rd/74th amendments, and tried to disaggregate the subjects given under schedules XI and XII into activities and sub-activities.
- An activity mapping drive at the state level should be carried out for all tiers of local government, and this democratic bottom-up planning exercise should be taken up as a national goal.
- Autonomy of institutions must not be compromised.
- New mechanisms rather than tribunals should be considered as solution to the problem of Inter-State River Water Disputes in India. Focus should shift from Conflict Resolution to Enabling Cooperation.
The implementation of GST in a large and diverse federal country ruled by different political parties is a remarkable achievement. The need of the hour is for centre and state to work together to raise revenue productivity. In the backdrop of economic slowdown and state’s tight fiscal space, centre can consider extending GST compensation to the states.
Q1. Despite the impressive milestones achieved by the GST regime, certain issues remain. Examine
Q2.Cooperative federalism is the only democratic way for the smooth functioning of Centre-State interactions. Illustrate.
A fundamental problem in the GST is the erosion of ‘trust’ between the States and the Centre. Critically evaluate.