The Goods and Services Tax (“GST”) has been touted as the most significant indirect tax reform in India. The GST seeks to rationalise the indirect taxation regime, and remove the cascading effect of taxes. The GST shall be a single tax that shall subsume a host of indirect taxes such as VAT, excise duty and entry tax. The Constitution (One Hundred and First Amendment) Act, 2016 (“GST Constitutional Amendment Act”) establishes the constitutional framework for the implementation of GST.1
The Amendment confers both the Centre and the States with a concurrent power to levy the GST. As per the newly inserted Article 246A, both Parliament and the State Legislatures have concurrent powers to levy the GST, and make suitable laws for its implementation.2 This is a significant departure from the erstwhile tax regime – where the taxing powers of the Union and the States were segregated by List I and List II of the Seventh Schedule, and no tax could be levied concurrently by the Union and the States. The GST model adopted by India has a three-tier structure: The Central GST - that is to be levied by the Central Government (“CGST”), the State GST - that is to be levied by each individual State
(“SGST”), and thirdly, an Integrated GST - that shall be levied exclusively on interstate supply of goods and services (“IGST”).3
As the GST is a single tax that replaces a host of indirect taxes, implementation of the GST requires collective decision-making and mutual coordination between the Union and State Governments. For making such collective decisions, a constitutional body known as Goods and Services Tax Council (“GST Council”) has been established.
The GST Council was envisaged to play a pivotal role in the implementation of the GST, and has taken various policy decisions that were necessary for moving towards this new indirect taxation regime. The Council shall also make a number of significant policy decisions in the coming months – once the ground realities of the new tax regime are brought to notice. The change in constitutional framework and working of the GST Council has significant implications for the fiscal autonomy of the State Governments. In subsequent sections of this paper, the authors shall examine the working of the GST Council and its consequential implications for the fiscal autonomy of the State Governments.
Prior to the introduction of the GST, the Centre as well as the States had the autonomy to levy a range of indirect taxes such as excise duty, service tax, entry tax and octroi. The Centre and the States had the autonomy to determine the tax rate applicable on different commodities, the exemptions to be granted etc. Multiple taxes and multiple tax rates created an inefficient and distortionary tax system – and encouraged tax evasion.4 The GST was intended to be a remedy to these problems, as it would be a single tax that subsumes a host of indirect taxes.
As the GST subsumes a host of indirect taxes, the Centre and the States lose their autonomy to levy a range of other indirect taxes - thus bringing about a significant change in India’s federal framework. The Centre has given up its exclusive power to levy excise duty on a range of commodities, along with its right to levy service tax and customs duty. At the same time, the States have given up their right to levy a host of taxes – which include VAT, entry tax, octroi, and taxes on betting and gambling. The Centre and the States still retain their power to levy a limited set of taxes. While the Centre has retained its right to levy excise duty on certain specified commodities such as tobacco products5, the States have retained their right to levy stamp duty, toll, mandi tax, and entertainment tax beyond the prescribed GST rate.6
As the States can no longer levy a range of indirect taxes, they may lose out on a considerable amount of revenue in the initial years of implementation of the GST. It was hence decided that they shall be compensated by the Centre for all revenue losses that occur during the first five years of the implementation of GST.7 But, as the GST intends to widen the tax base and harmonise the indirect tax system, the Centre and the States expect tax collections to increase over the coming years – which shall consequently lead to an increase in revenue in the future.
As the GST is a single tax that shall be levied on a common tax base, implementation of the GST requires mutual coordination between the Union and the States, and a range of decisions need to be taken collectively. Decisions on the structure, design and manner of implementation of GST shall have to be taken collectively by the Union and the States. For making such collective decisions, and to facilitate negotiations between the States and the Centre, a GST Council has been established under Article 279A of the Constitution.8
The members of the GST Council include the Union Finance Minister, the Union Minister of State for Finance, and the Finance Ministers of all State Governments. The Finance Minister of India and the Minister of State for Finance act as representatives of the Central Government. On the other hand, the Finance Ministers of each State Government act as representatives of their respective States. Under clause (4) of Article 279A, the GST Council has the power to make ‘recommendations’ on a wide array of policy matters, which inter alia include - deciding the taxes, cesses and surcharges that shall be subsumed into the ambit of the GST, determining the GST rate for different goods and services, and enlisting the goods and services that are exempted from the purview of GST.
The GST Constitutional Amendment Act does not clearly specify whether the ‘recommendations’ made by the GST Council are binding on the Union and the State Governments – and whether any deviation is permissible. The word ‘recommendation’ is used at four distinct places in the Amendment Act.9 But, clause (9) of Article 279A,10 which talks about the voting pattern in the GST Council - uses the word ‘decision’. This has led to confusion over whether States can deviate from the recommendations of the Council. In the authors’ view, as the purpose of establishing the GST Council is to take collective decisions on a range of policy matters, the ‘recommendations’ of the GST Council are equivalent to a ‘decision’ - and shall be binding on the Centre and the States.
The decisions of the Council are made collectively in accordance with a prescribed voting pattern, and every State Government has an equal voting right. As the Council makes decisions collectively, all State Governments lose their right to individually frame their own indirect tax policy. This brings about a significant change in the federal relations between the Union and the States. Prior to the introduction of the GST, the States had to autonomy to levy various indirect taxes such as VAT and entry tax, along with the freedom to determine the tax rate applicable, exemptions to be granted etc. This autonomy to determine the tax rate was significant, as it allowed States to raise revenue for meeting its short-term expenditure requirements.
However, under the GST regime, the States cannot individually alter the structure and the design of the GST, and can alter it only in accordance with the decisions of the GST Council. The States do not have the autonomy to alter the GST rate on a given commodity - and shall have to adhere to the rate fixed by the Council. For instance, the GST Council recently decided on a four-tier GST rate structure for different goods and services.11 State Governments shall no longer have the autonomy to alter this GST rate, and shall have to adhere to the rate decided by the Council.
To this extent, the GST dilutes the States’ autonomy to frame their own tax policy, and determine the tax rate applicable on different commodities. The only autonomy available now is with respect to certain taxes such as stamp duty and mandi tax, which have been kept out of the ambit of the GST. States shall have the autonomy to alter the tax rate and make other suitable alterations only with respect to these limited set of taxes.
The GST Council comprises of 31 State Finance Ministers (including the Finance Ministers of Delhi and Puducherry) and the Union Government is represented by the Finance Minister and the Minister of State for Finance. Each State Finance Minister is entitled to one vote, and the Union Government is also entitled to a single vote. Clause (9) of Article 279A prescribes the voting pattern to be adopted by the GST Council.12 As per Clause (9), every decision of the GST Council shall be taken by not less than three-fourths of the weighted votes of all members.13
However, the vote of the Central Government shall have a weightage of one-third of the total votes cast, and the votes of all State Governments taken together shall have a weightage of two-thirds of the total votes cast.14 Hence, although the Union is entitled to a single vote, its vote shall have a one-third weightage – according to which the total weighed vote of the Union shall be 10 votes. This voting mechanism throws up various scenarios that can have significant implications on fiscal autonomy. These scenarios shall be considered individually:
It has been argued that a one-third weightage of votes in favour of the Union effectively gives it a veto power over all decisions of the GST Council.15 As explained in scenario (b), even if all the States are in favour of a proposed measure, the Centre can veto it, and the proposal shall not go through. It has further been argued that giving the Centre a veto over the fiscal policies of the State Governments may severely dilute their fiscal autonomy, and goes against the federal character of the Constitution.16
Concerns over the Centre’s veto power were also raised by some members of the Select Committee of the Rajya Sabha – which examined the GST Constitutional Amendment Bill.17 The members also felt that the Centre’s veto power shall severely affect the fiscal autonomy of the States.18 Hence, to remove the Centre’s veto power, some members proposed that the Centre’s vote weightage should be reduced to one-fourth of the total votes cast, instead of one-third.19
The Centre’s veto power may significantly infringe on the fiscal autonomy of a single State, and may also dilute the fiscal autonomy of a group of States that have a common interest. This can be illustrated through the following two examples. Firstly, let us take a situation where a single State Government demands an increase in GST rate for certain categories of goods – for raising additional revenue. Such a change can take place only with the concurrence of the Centre, along with the concurrence of twenty other State Governments. In such situations, a State Government is dependent on the Centre’s vote – and loses its individual autonomy to alter its tax policy.
Secondly, in accordance with India’s diversity, different States may have different fiscal requirements. For instance, the seven north-eastern States may have unique fiscal requirements. Let us take a situation where all the North-eastern States demand additional compensation for revenue losses, or demand that the tax rate on certain commodities be reduced. In such a situation, their demand shall be met only if the Centre accedes to the same. Even if the north-eastern states obtain the concurrence of all other State Governments, the Centre shall retain its veto. Hence, the Centre’s veto power may also dilute the fiscal autonomy of a group of States that have a common interest.
While concerns over the Centre’s veto power and its impact on fiscal autonomy are most significant, it is pertinent to note that all the States also collectively exercise a veto over the Centre. As elucidated in scenario (c), a proposal made by the Centre shall not go through if all the States oppose it. Hence, in effect, the Centre and the States exercise a veto over each other. Also, in practice, the Centre may not be in a repeatedly stall the demands made by the State Governments – by using its veto power.
This is because every meeting of the GST Council requires a quorum of half of the members.20 If the Centre acts in a manner that is detrimental to the interests of the State, the States can exercise the option of boycotting the meetings of the Council – and may in turn refuse to cooperate with the Centre. If 16 or more States refuse to attend the meeting, then even the Centre shall not be able to put forth its proposals and get a decision from the Council. Hence, instead of exercising its veto power, the Centre shall be forced to negotiate and collaborate with the State Governments, and arrive at a mutually agreeable solution.
Another aspect of the voting mechanism is that no State can exercise an individual veto over the Council’s decisions. A proposal made shall fail only if it is opposed by 11 or more State Finance Ministers. As there is no individual veto, decisions of the GST Council shall be binding on the dissenting State Governments. If such a scenario occurs in the future, the dissenting State Governments can consequently make a claim that their fiscal autonomy has been compromised.
It is also pertinent to note here that nothing prevents States from making demands relating to their fiscal interests within the Council. For instance, in a recent meeting of the Council, Thomas Isaac, the Kerala Finance Minister insisted on a GST rate of 28% for lotteries - instead of the proposed rate of 5%.21 Mr. Isaac negotiated extensively with the Centre, and with the other State Finance Ministers to ensure that his demand was met.22 The Council hence provides a platform to every State to put forth its fiscal interests, and then negotiate extensively to ensure that its demands are met.
Till date, all the decisions of the GST Council taken over the course of around 20 meetings have been unanimous, and there has not been a need to resort to formal voting.23 However, in the coming months, States may raise various demands before the Council, if they feel that the GST has begun to affect their ability to raise additional sources of revenue. In such a situation, the Centre shall be forced to deliberate and negotiate with the States, and arrive at a mutually agreeable solution. It shall be impractical for the Centre to stall these demands by resorting to its veto power.
Also, in the coming months, the Centre may push for removing the multiple tax slabs that are prevalent under the GST, and may seek for a rationalisation of GST rates. These proposals may be opposed by certain States – who may have apprehensions over their revenue interests. If 11 or more States oppose these proposals, then these proposals shall fail. Hence, in subsequent months, the voting mechanism of the GST Council may be put to test, and we may also witness extensive negotiations between the Centre and the States.
Ever since independence, the revenue-generating capabilities of States have not been sufficient to meet their expenditure obligations.24 While States have had considerable autonomy to frame their indirect tax policy, they have always been dependent on the Centre for financial resources and grants.25 The changes brought about by the GST and the dilution in fiscal autonomy may make the States even more dependent on the Centre.
The dilution of fiscal autonomy has been justified on the premise that the GST shall widen the tax base - which shall consequently lead to increased tax collections for the Centre as well as the States.26 If there is an increase in tax collections for the States, then they may be ready to compromise their fiscal autonomy. But, if there is no significant change in tax collections and revenue growth, States may raise concerns regarding the dilution of their fiscal autonomy.
If revenue growth remains tepid in the coming months, States may also be forced to look for alternative ways of generating revenue. Right after the introduction of the GST, the Maharashtra Government raised the vehicle registration fee applicable in the State, while the Tamil Nadu Government raised the entertainment tax applicable on theatres.27 Similar measures may also be adopted by other States. States may also raise the rates of other taxes that are outside the ambit of GST – such as stamp duty, toll and mandi tax.
If States feel that their revenue interests have been affected, they may also refuse to abide by the decisions of the Council. Unlike the 2011 Amendment Bill, the GST Constitutional Amendment Act provides no recourse against a State that refuses to abide by the decisions of the Council.28 For instance, let us say that the GST Council decides to bring petroleum products within the ambit of the GST. Let us say that the State of Tamil Nadu was the only State that dissented to this proposal. It subsequently refuses to abide by this decision and continues to exclude petroleum products. The GST Constitutional Amendment Act provides no recourse in such a situation – where there is a deviation from the decision of the Council. Hence, such extreme situations shall have to be rectified through negotiations and persuasion within the Council itself.
In the coming months, the Centre may make several proposals to simplify the GST rates on different goods and services,29 and may also propose to bring exempted commodities such as real estate and petroleum products within the ambit of GST.30 These decisions may be opposed by various States, who shall intend to protect their revenue interests. If 11 or more State Finance Ministers oppose these proposals, these proposals shall fail. Also, if the revenue projections of States turn out to be tepid, the States may also make several demands before the Council. Hence, in the coming months, we may witness extensive negotiations and deliberations within the Council. As examined above, the Centre and the States shall be forced to negotiate extensively – and it shall be impractical for the Centre to stall demands by invoking its veto power.