GST’s ‘give-and-take’ attitude has dried up. India needs a system overhaul
In 'The Working of the Indian Constitution', T.M. Thomas Isaac examines the functioning of GST to assess if its high expectations have been realized.
The Goods and Service Tax (GST) Council has been hailed as a model federal institution, where both states and the centre are represented, and consensus is arrived through a detailed deliberative process. Until the 38th GST Council meeting in December 2019, there had not been a single instance of voting, despite strong differences of opinion voiced on many issues. They were settled in a spirit of give and take. That acrimonious meeting on the modification of the existing rate structure of lotteries was indeed a sign of changing times. By the end of the next year, the Council was on the brink of a serious disruption with the centre and states sharply diverging in their stand regarding the payment of GST compensation.
The emergence of GST has been the most important event in the history of center–state relations since the adoption of the Indian Constitution. According to the Constitution, powers to levy personal income tax, corporation tax, excise (other than on alcohol for human consumption), customs duties and service tax were the domain of the Centre. The responsibility for taxes on intra-state purchase and sale of goods lay with the respective states. The tax on intra-state trade took the form of sales tax, turnover tax, surcharges, luxury tax and various types of entry taxes. Sales tax, which was imposed at the first point of sale, and for some commodities at multiple points of sale, was replaced by value added tax (VAT
Inter-state sales were subject to the levy of central sales tax (CST), a central tax which was, however, levied and collected by the state in which the transaction originated. The central excise and service tax and commodity taxes of the states, other than those on petrol and alcohol, were merged into GST, to be jointly administered by centre and state. In effect, the states had to surrender a much higher share of their taxation powers, while the centre was still left with many of its buoyant taxes. Even according to the original constitutional arrangement, the states accounted for only 40 per cent of the combined revenues of governments, and this asymmetry worsened with the passage of GST.
Nevertheless, GST has been hailed by some as an exhibition of robustness of Indian federalism, because this major change was brought about by avoiding acrimonious controversies through elaborate negotiations in a spirit of give and take between centre and states, and between states. The first objective of this paper is to broadly outline this process.
We shall then go on to examine the functioning of GST during the last four years to assess whether the high expectations of GST have been realised in terms of revenue buoyancy, ease of doing business and positive impact on growth. The outcomes have been far from expectations. Worse, the give-and-take attitude that characterised the run-up to the new taxation system has virtually evaporated.
Finally, we conclude that, based on a review of the experience so far, a comprehensive overhaul of the GST regime is required so that federal concerns are addressed, buoyancy of revenue is assured, and the GST Council truly becomes an institution of federal cooperation.
so that federal concerns are addressed, buoyancy of revenue is assured, and the GST Council truly becomes an institution of federal cooperation.
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