Apex court’s GST judgment and fiscal federalism

Many veterans of the GST Council have openly complained about the manner in which the Council’s business was transacted.
For representational purposes (Express Illustrations)
For representational purposes (Express Illustrations)

The judgment of the Supreme Court on GST could not have come at a more opportune moment. The scepticism over the new tax system had been snowballing to the point where a former Union Finance minister, known for his commitment to GST, even feared that the time might come to script an elegy for the Indian GST.

Many veterans of the GST Council have openly complained about the manner in which the Council’s business was transacted. The new experiment in federal taxation has proved to be a bitter pill for the states. The SC observations provide an opportunity to revisit the GST from the perspective of fiscal federalism.

The Supreme Court judgment that the imposition of IGST on freight charges of CIF imports is ultra vires has been widely accepted. But its observations on the nature and functioning of the GST Council have drawn divergent responses. While opposition-ruled states have welcomed them as historic, the Union government has taken the stand that what was so obvious has only been reiterated and reinforced by the SC. The key observations of the apex court related to fiscal federalism are the following:

i) As framed by the Constitution, the GST Council is only a recommendatory body. It is not binding on the Union and the states. GST also does not abridge the supremacy of the legislative bodies.

ii) Both Parliament and state Assemblies have concurrent powers to legislate on GST. There is no repugnancy clause in the constitutional amendment and therefore, both the Centre and states have simultaneous legislative power.

iii) Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion—ranging from collaboration to contestation.

The Union government’s stand is that the verdict in no way is going to impair the GST Council’s current manner of functioning. But the preponderant opinion is that the functioning of the GST Council is no longer going to continue in the same way. The states will be emboldened to challenge attempts to steamroll the Council’s decisions.

The SC judgment provides an appropriate occasion for dialogue on several issues surrounding GST—this is in the true spirit of cooperative federalism. The minimum conciliatory gesture that the Union government can do to facilitate such a discussion is to extend the GST compensation period so that the disruption of state finances is averted.

The GST revenues have not been buoyant for a variety of reasons—the haphazard manner in which the rates were brought down when elections were around the corner, the delays in the E-WayBill system, setting up of an IT backbone and even midway changes in the tax design. As a result, most of the states are facing a precipitous fall in revenue once compensation ends. At a time of economic recovery, a squeeze on state government expenditure should be avoided.

The compensation is not drawn from the Union Budget but from a special fund collected by taxing sin goods and a few super-luxury items. There is no loss whatsoever for the Union government. So, one cannot understand why the Central government is opposing such a demand.

The judgment, whatever be the thinking of the Union government, has opened up a host of issues that have been considered buried deep. The constitutional amendment has only created a broad framework for the introduction of GST in the country. Within that constitutional framework, it is still an open question whether we can have a GST that is more responsive to the concerns of the states and the people.

The most important issue to be considered is whether the states can have the right to modify State GST rates. GST can be viewed as an extension of the VAT principle to the national scale. Though VAT had introduced uniform tax rates throughout India, in practice, there existed minor variations between states. It was the general understanding during the early discussions of GST at the Empowered Committee of State Finance Ministers that this flexibility would be carried into the GST.

The states need to be given the right to modify the SGST within a narrow band to introduce some level of federal flexibility into the GST. In the absence of the repugnancy clause there is nothing in the law to prevent a state government from exercising this right.

Providing such flexibility to states would in no way adversely affect the functioning of the National GST. i.e. Central GST and Integrated GST on interstate trade. The tax would remain perfectly VATable, or, in other words, there would not be any hindrance to the input credit chain across the nation.

We have a concrete experience of this in Kerala. After the 2018 floods, 1% additional cess was permitted to be levied on SGST within the state. For two years, the system of higher SGST in Kerala functioned smoothly. In the background of the SC judgment, why is this limited autonomy not being considered for the states?

The current corporate-led clamour for merging the present GST rate structure into a smaller number, if not one single rate, ignores the poverty and inequality that characterise our society. The rates on consumer durables and urban consumer products were the ones that saw the sharpest decline with the introduction of GST. It is these products that would further gain if the demand for a maximum ceiling rate of 18% is accepted. Raising the rates in the lowest band is also discussed. Such a rationalisation of tax would remove even the semblance of progressivity in GST.

With the introduction of GST, the plethora of commodity taxes which varied from state to state, and the central excise and service taxes, were subsumed into GST. Therefore, the problem of multiplicity of rates is exaggerated. The ideal of equity should be considered at least as important as the ease of doing business. Excess simplification is the anathema of fairness.

Finally, the institution of the GST Council needs to be revisited. The recent events underline the importance of re-evaluating the institutional framework and practices of the GST Council.

T M Thomas Isaac

Former Finance Minister of Kerala


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