Economic integration in India had largely remained a distant dream, due to the multiplicity of problems in fiscal relations between the Centre and the States. The division of taxation powers is given in Union and State List under 7th Schedule. There is no possibility for a clear demarcation of finances of the government which creates a strain on the Centre-State fiscal relations. This conflict is further accentuated in case of different ruling parties in the Centre and state as the fiscal relations get affected to achieve political ends. This propels the need for an efficient and stable relationship between the Centre and the States to derive optimal benefit of the fiscal resources.
The main problem of division of fiscal powers led to the emergence of a number of indirect taxes within the tax regime. The previous tax regime proved to be outdated as our tax system remained fairly unchanged from that envisioned in the Government of India Act, 1935. This tax system could not keep pace with the complexity of modern day transaction and supply chains. In addition to this, the institutions such as the Finance Commission and Planning Commission are fairly responsible for the for the fiscal indiscipline amongst States. The failure of these institutions in fulfilling their purpose of being an agent between the governments question the effectiveness of the Central-State fiscal relations.
The complex indirect tax structure in the country led to the conception of the idea of “one nation , one tax” which in essence is somewhat similar to what we can call as a national level VAT on goods and services. GST attempts to bring about a unified tax regime for the whole nation by the subsuming indirect taxes into one. The final consumer pays the final dealer in the supply chain as GST essentially only taxes the value addition at the stages of the transactions.
J.P Clark, rightly points out the essence of federalism by the describing that Federalism then consisted of “two separate federal and State streams flowing in distinct but closely parallel channels”. The principle of federalism embodies an idea of coordination among the Centre and the states sufficiently supplemented with division of powers to retain the autonomy of States .The previous conception of the fiscal federalism was centered around the idea that the inter-state base taxes like income tax was to be assigned to the central government whereas those which had local base were assigned to the states. The misconceived idea of being a ‘quasi federation’ as propounded by KC Wheare was ignored by the framers of the Constitution and made interdependence and cooperation as the guiding pillars of Federalism in India. We can see that from the spirit of Federalism as what was envisaged from the advent of the Constitution and even before is what we now know as “cooperative federalism”.
The idea of cooperative federalism is not a 20th Century one, but has its origins in the modern federal movements itself.This area of cooperative federalism is the point of intersection between the conflict of interest created between the Centre State fiscal relations and the want of autonomy by states in the matters of revenue generation.Its aims at promoting cooperation and reducing friction between Centre and the States.
The working of the GST Council and the administration of GST serve as focal points in analyzing the nexus between GST and cooperative federalism. One of the factors that promote cooperative federalism is the emergence of a Social Welfare State where the unified pooling of resources and cooperated effort is made to achieve public welfare.
The spirit of cooperative federalism is seen in the composition of the GST Council which consists of the Union Finance Minister as the Chairman. It consists of the Union Minister of State in charge of Revenue or Finance, and the Minister in charge of Finance or Taxation or any other Minister, nominated by each state government.the decisions taken by the Council is made by three-fourth majority of votes cast. Out of this, the Centre has a one-third vote share and states together have the rest two-third of votes.
The significant contribution to the Centre State Relations is the implementation of the Goods and Services Tax in Jammu and Kashmir which has led to the economic integration. The State Assembly of Jammu and Kashmir through the 101st Constitutional Amendment enacted a State GST law. This shows the power of cooperative federalism in achieving the unexplored frontiers of economic integration.
The Economic Survey of 2017-18 has come up with some interesting observations regarding GST embodying the concept of cooperative federation. Firstly,the GDP growth of 6.75% in the current fiscal has been largely attributed to the implementation of GST and the working of the GST Council as a cooperative federal unit in achieving this unprecedented feat despite the radical change brought in by the GST system. Secondly, the Survey further indicates that this system of cooperative federalism can be applied to agriculture policies to bring in seed centricity and achieve a balance between water scarce regions and water abundant regions. The practical applicability of this concept has the power to solve numerous problems plaguing our country.
However, for GST as a system to survive as a progeny of cooperative federalism , it is essential that Articles 302 and 304(b) has to be amended.
The creation of the GST Council is laudable, however the non-binding nature of the GST council and making it merely recommendatory dilutes the effect of its creation. The additional uncertainty of the working of the Financial Commission alongside of the GST council should not result in double subordination of powers as the clear demarcation is yet to be seen. With these challenges conquered, GST and the spirit of cooperative federalism would definitely prove to be a model for the benefits that can be derived from the use of this concept in multiplicity of situations.
Author: Harita Ramachandran, School of Law, Christ (Deemed to be University), Bengaluru
Compiled by GSTstreet for #GSTManthan
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