Model Answer
0 min readIntroduction
The Goods and Services Tax (GST), introduced on July 1, 2017, through the 101st Constitutional Amendment Act, marked a monumental shift in India's indirect tax regime. By subsuming a multitude of central and state indirect taxes into a single, unified consumption-based tax, GST aimed to create a 'one nation, one market, one tax' system. This reform has profound implications for India's quasi-federal structure, fundamentally altering the fiscal relationship and power dynamics between the Union and State governments. It has reshaped both cooperative and competitive aspects of Indian federalism, fostering greater integration while simultaneously raising concerns about fiscal autonomy.
Implications of GST on Indian Federalism
The GST regime has significantly transformed the landscape of Indian federalism, presenting both opportunities for enhanced cooperation and challenges to state autonomy. This dual impact is critical to understanding the evolving Centre-State relations.
Positive Implications: Promotion of Cooperative Federalism and Economic Integration
- GST Council: A Unique Federal Institution: The GST Council, established under Article 279A, is a collaborative body comprising the Union Finance Minister and state finance ministers. It serves as a platform for consensus-based decision-making on tax rates, exemptions, and administrative procedures, embodying the spirit of cooperative federalism. This unprecedented institutional mechanism fosters dialogue and joint ownership of tax policy.
- Harmonised Tax Structure and Common Market: By replacing multiple cascading taxes, GST has streamlined the taxation process and eliminated inter-state trade barriers. This has led to the creation of a unified national market, promoting economic integration and efficient allocation of resources across states.
- Enhanced Transparency and Compliance: The simplified tax structure and integrated digital platform (GSTN) have improved transparency and reduced tax evasion, leading to better tax collections for both the Centre and states in the long run.
- Destination-Based Consumption Tax: GST is a destination-based tax, meaning revenue accrues to the consuming state rather than the producing state. This can benefit states with higher consumption, potentially leading to a more equitable distribution of revenue in certain scenarios.
Negative Implications: Challenges to Fiscal Autonomy and Revenue Concerns
- Erosion of State Fiscal Autonomy: States have ceded significant power to levy independent indirect taxes (like VAT, entertainment tax, luxury tax) that constituted a substantial part of their revenue. This limits their flexibility to tailor tax policies to specific local economic needs or to raise revenue independently.
- Centralisation of Taxation Powers: While the GST Council is a joint forum, critics argue that the Centre holds significant sway due to its one-third voting power and the consensus-driven approach, which can sometimes lead to a unitary bias in decision-making.
- Revenue Shortfalls and Compensation Issues: Many states, particularly during the initial years and post-COVID-19, experienced revenue shortfalls. The GST Compensation Cess, designed to offset state revenue losses for the first five years (till June 2022), has expired, leading to renewed fiscal pressures and dependence on central transfers. States like Kerala faced significant deprivation in transfers and loan approvals in 2023-24.
- Unequal Distribution of Revenue: Data indicates that states contributing significantly to the GST pool do not always receive a proportionate share in revenue distribution, as the system aims to meet the fiscal needs of all states, including those less developed. This has led to criticism from some prosperous states. For instance, Maharashtra, a top contributor, does not always receive an equivalent share of GST refunds.
- Borrowing Restrictions: States continue to face central government-enforced borrowing caps, which, combined with reduced tax autonomy, can hamper their ability to raise funds, especially during financial crises.
Conclusion
The GST reforms represent a significant experiment in India's fiscal federalism, ushering in an era of greater fiscal integration and cooperative governance through the GST Council. While it has streamlined the indirect tax system, fostered a common national market, and improved tax compliance, it has simultaneously centralized taxation powers and curtailed states' independent revenue-raising capacities. Ensuring the long-term success of GST within India's federal framework necessitates continuous dialogue, mutual trust, and transparent mechanisms for revenue sharing and dispute resolution. A balanced approach that safeguards state fiscal autonomy while preserving the benefits of a unified tax system is crucial for strengthening cooperative federalism.
Answer Length
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