Taxing times for the States: 

Taxing times for the States

GST to herald new era in federalism Context: The withering of the state’s fiscal independence under GST strikes at the core of federalism Introduction:

  • The new Goods and Service Tax (GST) regime, introduced by the way of the 101st Constitutional Amendment, is based on a fundamental notion that uniformity in tax administration across the nation is an idea worth cherishing.
  • GST will integrate India into a single market with a standard rate of taxation.

Constitutional setup:

  • The Constitution of India establishes a clear, federal setup.
  • It prescribes two levels of government, one at the Centre and the other at each of the States.
  • The matters of national importance like foreign affairs and defence of India, are assigned to the Union, the responsibilities placed on the States are also particularly salient. For example, the power to legislate on public order, public health and sanitation, agriculture, water and land are all exclusively vested in the State governments.
  • This authority, as Chief Justice Maurice Gwyer observed in the context of the division made under the Government of India Act, 1935, which the constitution largely assumed, is no slight matter.

Partners in taxation:

  • In this constitutional setup, where the State governments are seen as equal partners, the founders thought it necessary to be very careful in allocating the power of taxation.
  • The central government was given the power to tax income other than agriculture income, and levy indirect tax in the form of customs and excise duties, state governments were given the sole power to tax the sale of goods and the entry of goods into a State.
  • This division of fiscal responsibility was made with a view to making States self-sufficient, and with a view to supplying to regional powers the flexibility needed to govern according to the respective needs of the people.
  • When resisting changes suggested to the draft Constitution in the Constituent Assembly, which demanded that the rates of sales tax be shifted to parliamentary law.
  • B.R.Ambedkar put it this way: “It seems to me that if we permits the sales tax to be levied by the provinces, then the provinces must be free to adjust the rate of the sales tax to the changing situation of the province, and, therefore, a ceiling from the Centre would be great handicap in the working of the sales tax”.

Confusion over GST Council:

  • The introduction of the GST, however, militates against this grand constitutional objective, against the aspirations set out in Article 1 of the Constitution, which declares India as a “Union of States”.
  • In endeavouring to pursue the goal of creating a single market through a homogenization of the tax regime, the amendment grants to both the Union and State governments concomitant powers over nearly all indirect taxes
  • The GST council comprises the Union Finance Minister, the Union Minister of State in charge of revenue or finance, and the minister in charge of finance from each State government.
  • The council’s decision will require a three-fourths majority, but the Central government’s votes will have a weightage of one-third of the total votes cast, according, thereby, to the Union a virtual veto.

Present situation:

  • Now, there’s some confusion over whether the GST Council’s decision are actually binding on the various State governments.
  • The newly introduced Article 279A, which creates the council, describes its decision as “recommendations”, but it also grants the council the power to establish a mechanism to adjudicate any dispute that might arise between any of its members in implementing the recommendations.
  • If the council’s recommendations are to be treated as purely advisory, it leaves us wondering why we need a dispute resolution mechanism at all.

Conclusion: India’s federal architecture is premised on a principle that promises the maintenance of an internal sovereignty, where State functions as separate political entities within the domain allocated to them. But often the drive to maintain federalism, where the Constitution demands it, goes beyond any obligation to preserve the rights of the States. It goes to the root of the constraints against all arbitrary power, and, to that extent, this amendment is a grave onslaught on the Constitution’s basic structure.

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