Source: The Hindu
- Prelims: Indian Economy(Fiscal Policy, GST)
- Mains GS Paper III: Fiscal policy, GST Council, Cooperative Federalism etc
ARTICLE HIGHLIGHTS
- The Supreme Court on pronouncing its verdict on a protracted dispute over the levy of Goods and Services Tax (GST) ocean freight charges paid by importers,held that such a tax was untenable.
- It has also dwelt at length on the nature of the recommendations of the GST Council, invoking the spirit of cooperative federalism, the Court has held that both the Union and State legislatures have “equal, simultaneous and unique powers” to make GST laws, and the recommendations of the Council, where they have one-third and two thirds voting share, respectively,are not binding on them.
- In Mohit Minerals vs Union of India, the Gujarat High Court held no tax could be levied under the IGST Act on ocean freight for services provided by a person located in non-taxable territory by way of transporting goods by a vessel from a place outside India up to the Customs station of clearance in India.
INSIGHTS ON THE ISSUE
Context
Goods and Services Tax(GST)
- GST was introduced through the 101st Constitution Amendment Act, 2016.
- It is the biggest indirect tax reform in the country.
- It was introduced on the pretext of ‘One Nation One Tax’.
- It has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax
- It is levied at the final consumption point and is essentially a consumption tax.
- It has led to a common national market as it helped mitigate the double taxation, cascading effect of taxes, multiplicity of taxes, classification issues etc.
- The GST paid by a merchant to procure goods or services (i.e. on inputs) can be set off later against the tax applicable on supply of final goods and services.
- The GST avoids the cascading effect or tax on tax which increases the tax burden on the end consumer.
Tax Structure under GST:
- Central GST to cover Excise duty, Service tax etc
- State GST to cover VAT, luxury tax
- Integrated GST (IGST) to cover inter-state trade. It is not a tax per se but a system to coordinate state and union taxes.
- It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.
GST Council
- It is a constitutional body under Article 279A for making recommendations to the Union and State Government on issues related to Goods and Services Tax(GST).
- It is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation of all the States.
- It is considered as a federal body where both the centre and the states get due representation.
- It is the first constitutional federal body vested with powers to take all major decisions relating to GST
- Composition of GST Council:
- Chairperson: The Union Finance Minister
- The Union Minister of State in charge of Revenue or Finance
- Ministers in-charge of Finance or Taxation of all the States
- Vice-chairperson: The members of the Council from the states have to choose one amongst themselves to be the Vice-Chairperson of the Council.
- Chairperson of the Central Board of Excise and Customs (CBEC): to be included as a permanent invitee (non-voting) to all proceedings of the Council.
Issues with GST Council:
- Political influence in the decision of GST Council:
Ideally, political affiliations should not matter in a Council set up to decide indirect taxes. Even the need for a meeting to determine tax revenues for States is evidently a political decision. - Lack of trust:
The GST Council is a compact of trust between the States and the Centre, set in the larger context of India’s polity.
The tragedy of the GST Council is that it is afflicted with spite and forced to function under the prevailing cloud of politics - Uncertainty after the guarantee of 14% growth ends:
- The States paid a huge price for GST in terms of loss of fiscal autonomy.
- GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year.
- This will minimize the risks of this new experiment for the States and compensate for their loss of fiscal sovereignty.
- This revenue guarantee ends in July 2022.
- This can lead to a crumbling of the precarious edifice on which GST stands today.
Federalism:
- Federalism in essence is a dual government system including the Centre and a number of States. Federalism is one of the pillars of the Basic Structure of the Constitution.
- R. Bommai vs Union of India case, the States are not mere appendages of the Union and the latter should ensure that the powers of the States are not trampled with.
Supreme Court on Federalism:
- Federalism in India is “a dialogue in which the states and the Centre constantly engage in conversations”.
- It is not imperative that one of the federal units (Centre or states) must always possess a higher share of power over the other units.
- It said that recommendations of the GST Council “are the product of a collaborative dialogue involving the Union and States”.
- It pointed out that Article 246A of the Constitution stipulates that both Parliament and state legislatures have “simultaneous” power to legislate on GST.
Cooperative Federalism:
- It is a horizontal relationship between centre and state, where they “cooperate” in the larger public interest.
- It enables states’ participation in the formulation and implementation of national policies.
- Both centre and State are constitutionally obliged to cooperate with each other on the matters specified in Schedule VII of the constitution.
Competitive Federalism:
- The relationship between the Central and state governments is vertical and between state governments is horizontal.
- The endowments of states in the free-market economy, available resource base and their comparative advantages all foster a spirit of competition.
- In Competitive federalism States compete among themselves and also with the Centre for benefits.
- It is not part of the basic structure of the Indian constitution. It is the decision of the executives.
- States compete with each other to attract funds and investment, which facilitates efficiency in administration and enhances developmental activities.
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- Article 246A: Parliament and the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
- Article 279A:The President shall, within sixty days from the date of commencement of the Constitution (One Hundred and First Amendment) Act, 2016, by order, constitute a Council to be called the Goods and Services Tax Council.
- Cascading effect of tax: when there is a tax levied on a product at every step of sale. The tax is levied on a value that includes tax paid by previous buyers thus making end consumer pay tax on already paid tax.
Way Forward
- GST is a positive step towards shifting the Indian economy from the informal to formal economy. It is important to utilize experiences from global economies that have implemented GST before us,to overcome the impending challenges.
- The gradual widening of the fiscal capacity of the states has to be legally guaranteed without reducing the Centre’s share.
- The recommendations of the GST Council “should be a product of a collaborative dialogue involving the Union and States”.
- As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be a pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations.
- The Council should focus on administrative changes, which can be introduced in the areas of assessment under GST, advance ruling mechanism, constitution of tribunals, etc. which shall ensure timely disposal of issues and will also provide certainty to the industry.
QUESTION FOR PRACTICE
Goods and services Tax(GST) fosters cooperative federalism along with competitive federalism. Critically analyze with recent illustrations. (200 WORDS, 10 MARKS)
