Hari Prasath D.G
SASTRA University, Thirumalaisamudram,Thanjavur

Introduction:

The Goods and Services Tax regime, considered as a step in furtherance of cooperative federalism has been viewed as a fiscal framework hugely reliant on the cooperation between states and the central government. However, this essay seeks to argue against this notion and goes on to describe how the Constitutional provisions empower state legislatures enormously and liberates them from fetters hitherto imposed.

State’s interminable quest for revenue:

It is a known fact that manufacturing states initially opposed the portrayal of the tax as a destination based tax for the reason that any good or service supplied to persons or places outside the state territory denoted amount of tax revenue lost. In this regard, it is to be stated that a tax which is consumption- oriented, by its very nature has disincentivised the economic activity of production in several countries in which it has been implemented. In fact, the aforestated issue was a major crisis that countries implementing GST faced.

An another fundamental difference between a production-revolving exaction and the present one is that the former encourages real economic activity and prompts states to support and foster economic growth and the latter only concerns itself to taxing consumption. Furthermore, a production-oriented levy does not affect, influence or have a bearing on free inter-state trade and commerce whereas a destination based tax does. This understanding is a desideratum in view of the unique contribution to the world jurisprudence on GST that the Indian GST has made.

There is no specific method that has been adopted for the apportionment or equalisation of the fiscal revenue collected on inter-state goods and services. Specific importance to fiscal equalisation is necessary because certain states would not have adequate revenue owing fundamental change in the taxing incidence from manufacture based to consumption based. It is in this context that Cooperative federalism assumes immense importance.

Cooperative Federalism as a justification:

Cooperative Federalism was the term coined by AH Birch to describe a system where there is an element of cooperation and understanding between central and regional governments predominantly mirroring the dependence of provincial governments on remittances from the central government.[1] From a political perspective, cooperative federalism represents a scenario where sovereign power is shared. The central and regional governments operate in the same domain and consequently share functions and power.[2]

The usurping of taxing powers of the state was justified on the basis of the idea of cooperative federalism stating that the divesting of taxing powers and concomitant autonomy is an intrinsic part of the Indian federal structure. It was further legitimized on the ground that the Parliament cannot interfere into a state’s GST law thereby according enormous power to States to regulate and legislate their respective GST laws by themselves. This might just also be a transition from forced integration of disparate state interests to abundantly autonomous and sovereign state legislative powers. This could be inferred from the language adopted in Article 246A of the Constitution which confers simultaneous power to both the Central and State Governments to impose CGST and SGST respectively. The laudable mission to make an equal treatment of disparate state interests and the concomitant geo-political differences in the pretense of unification and confederation only threatens to degenerate into a constitutionally validated emancipation of states. This legislative liberty, during exigencies and unavoidable adversities could also foment over-indulgence and excessive state interference in free trade for tax purposes.

The redistribution of taxing powers, vehemently criticized as being anti-federal and justified on the noble notion of cooperative federalism has transcended the age old quasi-federal label and marks the beginning of a perfectly federal republic. Firstly Art.246A by appending a non-obstante clause and overriding Art.246 and 254 declares that the GST is a simultaneous levy. This provision of Art.246A also eliminates any remote suspicion of the Centre retaining essential exclusive powers over the imposition of GST.

Material alterations by States in respect of GST could also escalate the possibility of double taxation or on a large scale, result in macro-economic instability. There are no alternative arrangements between the Centre and State with regard to minimum requirements, standards and rates of taxation. This gives an impression that the provision fails to prohibit dissimilitude in GST legislations. The lack of effective horizontal and vertically coordinated fiscal equalisation and compulsory harmonizing mechanism could lead to inconsistency in the tax rates. In addition to this, it is opined that the success of cooperative federalism is hugely reliant on political exigencies and the extent of similarity in political and administrative ideologies. This would be a realistic dream only when there are substantial levels of similitude amongst the states and the central government. The fact that the states are free to enact and amend State GST laws only augments the same. Cooperative federalism would be a distant dream if political control is diluted at the centre or if regional parties occupy state legislatures. This is a relevant consideration as cooperative federalism in the Indian context is predominantly dependant on dominant political presence of a national party or the similarity in ideologies.

Conclusion:

A consumption-based levy could also have a bearing on inter-state trade and commerce. This difference in delineation is also one of the reasons for why GST is depicted as India’s biggest indirect taxes reform. While pointing at the lacunas the amendment fails to plug, it must also be taken into account that such inherent intrinsic differences could be deliberately incorporated in the GST framework so as to protect the federal morale of the country and to make the reform amenable to the basic structure of the Constitution. But the ultimate question is whether such strenuous efforts are required to protect a notion that does not even secure a place in the preamble?

[1] AH Birch, Federalism, Finance, and Social Legislation in Canada, Australia, and the United States, (Oxford, Claredon Press 1955) 305

[2] MD Reagan, “The New Federalism”, 21.

Compiled by GSTstreet for #GSTManthan

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