Rohitesh Tak

The inception of the Goods and Service Tax has been gratified to be a watershed in the history of indirect tax reforms in India. The present GST regime seeks to rationalize the cascading effect of various indirect taxes through a uniform taxation system, which shall be fixed by the GST Council consisting of the finance ministers of various states and the union. It is contemplated that GST promotes ‘cooperative federalism’ by collective decision making. However, the very concept of collective decision making in the realm of taxation, has raised several issues relating to the fiscal autonomy of the state governments to fix their own taxes and tax rates in order to generate their revenue and use such amount for the development of their regions. Therefore, it has to be ascertained whether the present regime of GST under the guise of ‘cooperative federalism’ contradicts the traditional notions of the principles of federalism which had always guaranteed autonomy to the states in the dominion of taxation.

The word federalism is derived from the Latin word ‘foedus’, meaning a pact or covenant[1] which essentially is an organizing principle of a state which allocates, through constitutional provisions, political power to a general government and regional governments in a way that creates substantially autonomous component units as well as a federal nation[2] even though its essence lies not in the constitutional or institutional structure but in society itself.[3]Under federalism the  arrangement amongst states is one of partnership, established and regulated by a covenant, whose internal relationships reflect the special kind of sharing which must prevail among partners, namely one that both recognizes the integrity of each partner and seeks to foster a special kind of unity among them.[4] If a political system is a sovereign state, but does not know any autonomous subnational units, it is a unitary state and cannot be termed as federal.[5] Therefore exploring federalism means exploring autonomy[6] which shall include fiscal autonomy as an aspect of sovereignty of the state.[7] Since, as per Edmund Bruke the revenue of the state is the state in itself.[8]

Generally, financial Autonomy as a subsect of ‘autonomy of state’ means the independence or freedom given to Local Government to administer their funds or money without any interference from any other tiers of government.[9] A common way to compare and assess fiscal autonomy is the extent to which resources and responsibilities are under the control of local and regional governments.[10] Further, “tax autonomy” as part of  ‘financial autonomy’ captures various aspects of freedom sub-central governments have over their own taxes. It encompasses features such as sub-central government’s right to introduce or to abolish a tax, to set tax rates, to define the tax base, or to grant tax allowances or reliefs to individuals and firms.[11]

Today since, the resources are scarce and demands disproportionately heavy. States demand more financial autonomy to pay due attention to their backward regions.[12] Therefore, It is not enough to provide them with funds through transfers from the higher level governments. They must be “able to control the level of revenue at the margin, that is they must be able to set the level of taxes to correspond to the desire of voters.”[13] Hence, In a vast federal country like ‘India’ where federalism is a part of the basic structure of the constitution[14] and which suffers from a huge fiscal inequality, it is important for the fiscal autonomy of the states to be protected, be it in the power to fix the rate or the quantum of revenues to be collected.[15]

The One Hundred and Twenty Second Amendment Bill of the Constitution of India, officially known as The Constitution (One Hundred and First Amendment) Act, 2016, introduced a national Goods and Services Tax in India from 1 July 2017[16] by amalgamating a large number of Central and State taxes into a single tax.[17] The introduction of the GST, however, militates against the grand constitutional objective, against the aspiration set out in Article 1 of the Constitution, which declares India as a “Union of States”.[18] Since, as per the present scheme the rates for both, the CGST and the SGST, will be fixed by the GST Council, whose members are State finance/revenue ministers and chairman is the Union finance minister.[19] The States cannot individually alter the structure and the design of the GST, and can alter it only in accordance with the decisions of the GST Council[20] which take its decisions on the basis of a majority. This sounds reasonable, but there is a catch. A majority is defined as three-fourths of those present and voting, with the union having one-third weightage of all the votes. This effectively gives the union a veto over every decision of the GST Council.[21] Furthermore, even if it is argued that Article 279A, which creates the council, describes its decisions as “recommendations” and thus cannot binding on the state governments.[22] It would not be sustainable, since the purpose of establishing the GST Council is to take collective decisions on a range of policy matters, therefore the ‘recommendations’ of the GST Council would be inadvertently equivalent to a ‘decision’ and will be binding on the States.[23] Therefore, this development needs to be viewed in the context of a steady erosion in the states’ freedom to decide on taxes and tax rates which would eventually lead to the loss of political right to fix its own tax rates.[24]

Thus, it is clearly discernible that the present GST regime has failed to stand the true test of federalism, as it compromises with the fiscal autonomy of the various state governments to fix their own tax and tax rates in order to generate revenue. It mainly contemplates ‘controlled federalism’ rather than ‘cooperative federalism’. Hence, the ideal taxing structure which ‘India’ shall perceive to embrace should be in accordance with the principle of ‘federal loyalty’, by which the state governments shall enjoin the maximum autonomy to generate revenue through its own taxing powers.

[1] Ranjit Singh, Indian Federalism and the Demand for State Autonomy: The Akali Perspective,62 Pakistan Horizon, 55, 55-73 (2009).

[2] Ivo D. Duchacek, Comparative Federalism: The Territorial Dimension Of Politics 56(1970).

[3] William. S. Livingstone, Federalism and Constitutional Change 333-352 (Oxford: Clarendon Press, 1956).

[4]  Daniel J. Elazar, The State System + Globalization (Economic Plus Human Rights) = Federalism (State Federations Plus Regional Confederations), 40 S. TEX. L. REV. 555, 564 (1999).

[5] Ivo D. Duchacek, Comparative Federalism: The Territorial Dimension Of Politics 194 (1970).

[6] Prof. Johannes Chan & Prof. Dr. Christine Kaufmann, Federalism and Autonomy in Switzerland and China,, (last visited Jan. 31, 2018).

[7] Nico Groenendijk, Federalism, Fiscal Autonomy and Democratic Legitimacy in Europe: Towards Tax Sharing Arrangements,1 L’Europe en Formation,11, 3-19, (2011).

[8] Edmund Burke, Reflections on the Revolution in France 328 (1790).

[9] Dr. Ngozi Nwogwugwu & Tajudeen Alabi Olusesi, Operation of State-Local Governments Joint Account and Financial Autonomy of Local Governments in Nigeria’s Fourth Republic,4 IJIRD. 85, 85-91, (2015).

[10] Hansjörg Blöchliger & David King, Fiscal Autonomy of Sub-Central Governments 1-30 (OECD, Working Paper No. 2, 2006),

[11] Id.

[12] Shodhganga,, (last visited Jan. 31, 2018).

[13] McLure Charles E. Jr, ‘Tax Assignment and Subnational Fiscal Autonomy’, 54 Bulletin of International Bureau of Fiscal Documentation, 628, 626-35 (2000).

[14] SR Bommai v Union of India (1994) 3 SCC 1 (India); Kuldip Nayar v Union of India (2006) 7 SCC 1 (India).

[15] GST and Autonomy of States, 45 Economic and Political Weekly, 5, 5-6 (2010).

[16] Livemint,, (last visited Jan. 31, 2018).

[17] G.s.t Council,, (last visited Jan. 31, 2018).

[18] The Hindu,, (last visited Jan. 31, 2018).

[19] The Hindu, (last visited Jan. 31, 2018).

[20] India Law Journal,, (last visited Jan. 31, 2018).

[21] Alok Kumar Prassana, Goods and Service Tax, 51 Economic and Political Weekly, (2016).

[22] The Hindu,,(last visited Jan. 31, 2018).

[23] India Law Journal,,(last visited Jan. 31, 2018).

[24] The Hindu,,(last visited Jan. 31, 2018).

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