Model Answer
0 min readIntroduction
The Indian economy, prior to 2017, was characterized by a complex indirect tax structure with multiple layers of cascading taxes levied by both the Centre and the States. This complexity hindered economic efficiency and created distortions. To address these issues, the 101st Constitutional Amendment Act, 2016, paved the way for the Goods and Services Tax (GST), a unified indirect tax regime. This amendment fundamentally altered the fiscal federal structure of India, necessitating a careful examination of its impact on the accommodative spirit of federalism – the ability of the Centre and States to coexist and cooperate in a mutually beneficial manner.
Background and Key Provisions of the 101st Amendment Act
The need for GST was recognized by the Kelkar Task Force on Indirect Tax Reforms in 2009. The 101st Amendment Act was enacted to facilitate the implementation of GST by amending various articles of the Constitution. Key provisions include:
- Article 246A: Grants power to the Parliament and State Legislatures to make laws with respect to GST.
- Article 268A: Defines GST as a tax on the supply of goods and/or services.
- Article 279A: Establishes the GST Council, a constitutional body responsible for making recommendations on all matters related to GST.
- Amendments to Article 286: Removed the power of the Centre and States to levy taxes like Central Sales Tax (CST), State Sales Tax, etc.
Significance of the 101st Amendment Act
The 101st Amendment Act holds immense significance for several reasons:
- Economic Integration: GST created a common national market, removing inter-state barriers to trade and fostering economic integration.
- Simplified Tax Structure: It replaced a multitude of indirect taxes with a single tax, simplifying the tax system and reducing compliance costs.
- Improved Tax Compliance: GST’s input tax credit mechanism incentivizes businesses to comply with tax regulations.
- Increased Revenue: The GST regime has, over time, led to increased tax revenue for both the Centre and the States. (As per RBI data, GST collections crossed ₹1.68 lakh crore in April 2023).
Federalism and the GST Council
The establishment of the GST Council is central to assessing the amendment’s impact on federalism. The Council comprises the Union Finance Minister, the Union Minister of State for Finance, and the Finance Ministers of all States. Decisions are made through a weighted voting system, with the Centre having one-third of the voting power and the States collectively holding two-thirds.
This structure reflects an attempt to balance the interests of the Centre and the States. However, the accommodative spirit of federalism is tested in several ways:
- Decision-Making: While the Council strives for consensus, disagreements often arise, particularly regarding tax rates and compensation mechanisms.
- Centre’s Influence: The Centre’s veto power, although limited, can influence decisions.
- Compensation Cess: The implementation of GST initially faced challenges related to revenue losses for States. The compensation cess, designed to address this, has been a point of contention, with States alleging delays in receiving their due share.
Accommodative Federalism: A Mixed Assessment
The 101st Amendment Act presents a mixed picture regarding accommodative federalism. On one hand, the GST Council provides a platform for Centre-State cooperation and consensus-building. The very act of jointly reforming the tax system demonstrates a willingness to work together. The Council’s structure, with its emphasis on weighted voting, acknowledges the importance of State representation.
On the other hand, the Centre’s inherent financial strength and administrative capacity can create an imbalance in the relationship. Disagreements over GST rates, compensation, and the overall design of the GST system highlight the potential for friction. The initial delays in compensating states for revenue losses, as highlighted by several State Finance Ministers, underscored these tensions.
| Aspect | Strengthening Federalism | Weakening Federalism |
|---|---|---|
| GST Council | Platform for Centre-State cooperation | Centre’s veto power & potential for dominance |
| Revenue Sharing | Compensation cess (initially) | Delays in compensation payments |
| Tax Policy | Joint decision-making on tax rates | Potential for Centre to influence policy |
Conclusion
The 101st Constitutional Amendment Act, while fundamentally improving India’s indirect tax system, presents a nuanced picture of federalism. It embodies an attempt at cooperative federalism through the GST Council, but the inherent power imbalances and potential for disagreements necessitate continuous dialogue and compromise. The long-term success of GST, and its impact on the accommodative spirit of federalism, will depend on the Centre’s willingness to address State concerns and ensure a truly equitable and collaborative approach to fiscal policy.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.