IMPACT OF GST ON THE CENTER STATE RELATIONS IN INDIA (By- Chirag Patel R S)
IMPACT OF GST ON THE CENTER STATE
RELATIONS IN INDIA
Authored
By- Chirag Patel R S
ABSTRACT:
The
GST Act was enacted to bring a simpler, transparent taxation system to the
country. It aimed to bring a unified taxation system throughout the country. It
has brought in several changes in the taxation system as well as the federal
structure of the country. This involved the taxation of goods and services in
an integrated manner and due to which the separate tax laws for the center and
state has been blurred. The Constitution previously had not provided for any concurrent
taxation powers to the Centre as well as the States. This required the
Constitution to be amended for conferring simultaneous power on Parliament as
well as the State Legislatures, including every Union Territory with
Legislature to make laws for levying goods and services tax on every
transaction of supply of goods or services or both.
This
paper will study the changes in the center state relations due to the enactment
of GST and how the present division of revenues takes place between the center and
the state. The paper addresses certain constitutional hurdles due to the
enactment of GST and suggests certain measures which can help in removing the
present difficulties faced by the country in the process of uniform taxation.
CONTENT
ANALYSIS:
I.
INTRODUCTION
The
federal structure is one of the basic features of the Indian Constitution. The
states have financial autonomy over certain subjects. The constitution
bifurcates the powers and duties between the center and state. The GST law
which was enacted has impacted the center state relations. The first part of
the research paper deals with a brief introduction to GST, the concept of
federalism, and the purpose of the interstate council. The paper later proceeds
with the impact on center-state relations. The paper concludes with the
researcher trying to give certain suggestions to maintain the center-state
harmony.
A. GST
GST
(Goods and Services Tax) is an indirect tax that has replaced several other
indirect taxes in India. It was enacted on March 29, 2017, in Parliament as
part of the Indian government's execution of the One Hundred and First
Amendment to the Constitution of India, however, it took effect on July 1,
2017. GST is designed to be a dual-levy taxation system, with both the federal
and state governments imposing and collecting taxes. Central GST (CGST) and
Integrated GST (IGST) would be managed by the Centre, while the States (SGST)
will manage State GST. This will contribute to the country's economic
unification, stability, and transparency. The use of a single tax base would
also aid in the avoidance of double taxation. For tax collection, there are
five different tax slabs: 0%, 5%, 12%, 18%, and 28%. However, certain items are
free from GST, such as petroleum goods, alcoholic beverages, and electricity.
Rough, precious, and semi-precious stones are charged a special fee of 0.25
percent on gold and 3 percent on silver. Furthermore, a 22 percent cess or
additional charges on top of the 28 percent A few things, such as aerated
drinks, expensive autos, and tobacco products, are subject to GST. Pre-GST,
most commodities had a statutory tax rate of about 26.5 percent; post-GST, most
items are likely to have a tax rate of around 18 percent. Various indirect
taxes are grouped under the GST umbrella. Furthermore, the use of information
technology via the Goods and Service Tax Network (GSTN) would make things more
transparent and easier.
The
purpose of GST in India is to:
i.
Remove the tax cascading effect
ii.
Implement a simpler indirect taxation system
iii.
Increase the size of the tax base
iv.
Put in place an equitable levy
v.
Make things more transparent
vi.
Obtain consistent tax rates across the nation
vii.
Develop cooperative federalism.
viii.
Transition to a tax system based on a digital
basis.
ix.
Boost income for the federal and state governments
x.
Put better mechanisms in place for the nation
B. Federalism
In S. R. Bommai v Union of India, several
judges have characterized Indian Federalism in diverse ways. SAWANT, J., has
observed, “Democracy and Federalism are an essential part of our Constitution
and are parts of its basic structure.”
JEEVAN REDDY, J. observed “The fact under the scheme of our
Constitution, greater power is conferred upon the Centre visà-vis the State do
not mean that State is mere appendages of the Centre. Within the sphere
allotted to them, States are supreme. The Centre cannot tamper with its powers.
More particularly, the courts should not adopt an approach, an interpretation,
which has the effect of or tends to have the effect of whittling down the power
reserved to the states.”
A
Federal-State derives its existence and every power- executive, legislation, or
judicial- whether it belongs to the federation, or the component State, - is
subordinate to and controlled by the Constitution. A constitutional division of
power between the center and the component territorial units is a crucial point
in most definitions of federalism the center and the component territorial
units is a crucial point in the most definition of federalism and in our
graphic model of a federal system and under the VII Schedule and part Vth, VIth
of Constitution of India, power is distributed between center and state. [1]
The
GST Act has affected the federal structure by replacing VAT. Certain powers of
revenue which were vested with the state are now transferred to the center.
This will be a catalyst for the conflict between the center and states. Thus,
the role to prevent the conflict, the interstate council has been established.
C. Inter-State
Council
The
Constitution of India establishes a policy that sets out the territories of the
Union and the countries that it can use in its assigned territories. In line
with this, the Constitution establishes a comprehensive system of devolution of
power between the Union and the States in the areas of law, administration, and
financial authority. The issue of legislative power is divided into three Lists
in the Seventh Schedule to the Constitution: Union of Trade Unions (Table I),
List of Provinces (Table II), and Related Program (Table III). Parliament has
been given the remaining powers to legislate. The Union Government has taken
steps to address disputes over the transfer of power between the Institute from
time to time.
In
1988, the Union Government established the Commission, led by Justice R.S.
Sarkaria, to evaluate the effectiveness of existing Union-State programs. The
establishment of the Eternal Council of Provinces as a separate national forum
for discussion, with the mandate clearly defined in Article 263 of the
Constitution of India, was one of the key recommendations of the Sarkaria
Commission. The Inter-State-Council was established under Article 263 of the
Constitution of India by order of the President dated 28/5/2009, in response to
this recommendation. Composition of Council as follows:
·
Prime Minister Chairman
·
Chief Ministers of all States Members
·
Chief Ministers of Union Territories having a
Legislative Assembly andAdministrators of UTs not having a Legislative Assembly
and Governors ofStates under President’s Rule (Governor’s Rule in the case of
J&K)Members
·
Six Ministers of Cabinet rank in the Union
Council of Ministers to benominated by the Prime Minister Members
·
Four Ministers of Cabinet rank as Permanent
invitees Members
The
Inter-State Council is a consultative body mandated to investigate and discuss
matters of mutual interest between the Union and the Provinces or between the
provinces, making recommendations, especially on better policy and
co-ordination of these matters, and alternatives. news. General Interests Areas
to which the Chairperson may refer. The Council also considers any
additional national interest issues that the
Chairperson may raise in the Council.[2]
II.
Impact On Centre-State Relations
A. The
Vat And Gst
VAT
and GST are synonymous in most nations throughout the globe, but not in India
for several reasons. In India, the Value Added Tax (VAT) was introduced to
replace the Sales Tax. VAT was a consumption tax levied on goods when the value
was added at each level of the supply chain, and it was eventually paid by the
end consumer, like Sales Tax. However, unlike Sales Tax, which is only charged
on the final sale of goods, it is. VAT is a tax that is likely to be paid on an
organization's value-added at each step of providing services or manufacturing
products. VAT is the most varied and transparent indirect tax, with the ability
to enhance tax collection by broadening the tax base and deterring tax fraud built-in.
The notion of Input Tax Credit/Rebate is used to offer a set off for previously
paid taxes under VAT. The Value Added Tax (VAT) was India's first major
indirect tax reform, and it was made possible by the Indian tax regime's
constitutional requirements. Although VAT was a much-needed change in the
Indian tax system, it resulted in a complicated tax structure that helped India
achieve better transparency and a partial decrease in tax evasion. Each state
had its VAT rates, as well as a slew of other municipal taxes such as Entry Tax
and Octroi. Due to constitutional stipulations, each state had autonomy under
the State List, through which VAT was implemented, and each state had the right
to collect and charge VAT on assorted items at rates specified by the state. [3]
B. The
constitutional Changes Relating To Center-State Relations.
The most significant changes by the 101st Amendment
of the Constitution are as follows:
a) In
article 246, a new article has been added which enables to make tax provisions
byboth Union and State concerning the GST scheme. It allows both to levy
taxeson goods and services. It further specifies that Union has exclusive power
to make laws(Tax provisions) concerning the inter-state supply of GST.
b) Article
268A of the Constitution was omitted. One must remember that it was addedonly
to allow the Union to tax services but as GST includes both goods and services,no
special provision for taxing services was required.
c) A new
article 269A has been inserted which provides for goods service tax on supplyof
inter-state trade/commerce. The tax shall be levied only by Union Government
andshall be distributed/shared between center and state. This sharing shall be
decided bythe Goods and Service Tax Council. But as the levying and collecting
authority is UnionThe government and the decision need to be approved by the
Parliament.
d) Article
270 was also amended to provide for the distribution of revenue collected
underGST between the Union and States. Finance Commission becomes relevant
because thisdivision is especially important for the fiscal autonomy of states
which receive a fixed proportionof GST collections as provided by the finance
committee and approved by the Parliament.
e) Article
271 of the Constitution was also amended. Surcharges could not havebeen added
to GST because of article 246A. As the power of the Centre was limited to
levysurcharge on Goods and Services article 271 was amended. Now, Union
Governmentcan levy a surcharge on any good or service.[4]
For
any amendment of the Constitution, earlier only 2/third majority of Parliament
was made mandatory. In the case of GST, all states were also a part, and their
interests were also involved in this amendment of the Constitution. Hence, a
special provision was made which requires the ratification of the bill by the
legislatures of at least half of the States in addition to the method of voting
mentioned above for amendment of the Constitution. This amendment is especially
important because any time in the future if any modification is to be done in
GST Council, the bill
(Constitutional
Amendment) will require the ratification by legislatures of at least half of
the States. So, the GST Council created under Article 279A became a
constitutional body.
C. The
Dual Gst Model And Federalism
India
adopted a dual GST approach, in which taxes are imposed simultaneously by the
center and the states, or on a single basis that encompasses both goods and
services, throughout the country in the following manner: All sales within a
single state's jurisdiction are taxed by the Centre and the States on the same
basis and at the same rates, which is known as the GST rate. Even though it is
split into two equal portions, the Centre's share is known as CGST, and the
State's share is known as SGST. The Centre solely taxes all states at the full
GST rate, regardless of where they are located. This tax is known as the IGST.
In the event of cross-state sales of goods and services, the Input Tax Credit
on purchases may be deducted from taxes paid on sales, regardless of source.
Only those Union Territories that do not have a legislature will be referred to
as UGST. The IGST concept is a fantastic illustration of Centre-State
Co-operative Federalism in India. The Centre will impose a full IGST (full
GST), which, as previously said, is equivalent to CGST Plus SGST. After
adjusting Input Tax Credit applicable under IGST, CGST, or SGST on his
purchases, Inter-State shipments will pay IGST solely on additional value
(value addition). The state that provides the products will transmit the SGST
credit utilized in the payment of IGST to the Centre, and the state that
receives the supply (the ultimate destination of the commodity) would be
entitled to collect the credit from the Centre when discharging his output tax
duty. The tax is transferred from the states where the items are sold to the
supplier state once the center has claimed it. The most significant benefit of
this type of IGST model is that it is self-monitoring, even though all relevant
transaction information would be submitted to a central agency that would
function as a clearinghouse, transferring funds from the supplier state to the
buyer state after verifying claims and informing both state governments. [5]This IGST model of tax solves
various kinds of disputes that may arise, but certain grey areas need to be
cleared in cases where the inputs are taken from various suppliers who are not
registered. But this impacts consumers and businesses and not the relationships
of States. [6]
D. Gst
Compensation To States
GST
scheme of taxation has altered the mechanism of VAT as GST is charged at the
time of supply and it depends on the destination of consumption e.g. If any
good is manufactured in U.P. (State A) but consumed in Karnataka (State B), the
tax will be collected in Karnataka (State B) thus the revenue generated through
GST is credited in the account of the state where consumption takes place and
not where the production has taken place (State U.P.). This is a simple example
for commodities like biscuits, and toffees but there could be complex
situations where inputs are sent to other states and then after value addition
may be sold in any of the states. Due to this nature of the tax, many states
(manufacturing States like Gujarat, Haryana, Karnataka, Maharashtra, Tamil
Nadu, and Andhra Pradesh) felt that they would have serious revenue losses.
Central government after analyzing the problem of fear among States passed a
Transitory Act for five years on 12th April 2017 by the Ministry of Law and
Justice by the name of 'The Goods and Service Tax (Compensation to States) Act
2017’, to provide for the loss of revenue arising out on account of
implementation of Goods and Service Tax in pursuance of the provisions of the
Constitution (One hundred and first amendment) Act 2016 which shall extend to
the whole of India and shall come into force on such date as the central
government may by notification announce in the gazette. The Act was created as
mentioned above to compensate States in case of any loss in revenue. The
compensation is offered for five years from the date of GST implementation. The
calculation of revenue loss in any fiscal year shall be based on the revenue of
the fiscal year 2015-16 which shall be treated as the base year. Revenue growth
of 14% shall be added to the revenue of the base year for calculating the
revenue loss. One must remember that revenue of any state for 2015-16 (base
year) shall be estimated by adding revenue from Central Sales Tax, State VAT,
Local body Tax, Octroi, Entry Tax as well as revenue from Advertisement Tax,
Luxury Tax, etc. but will not include the revenue of such goods which have not
been included in GST such as petroleum products. Most importantly it was made
clear that the calculation of compensation is done on a provisional basis and
released at the end of every 2 months. But the compensation will not only be on
a provisional basis, but this was also to give relief to States for regular
expenditure. A yearly calculation of the overall revenue will be done which
shall also be audited by CAG of India. A compensation Cess Fund has been
created which will be called a GST Compensation Cess. GST compensation cess
applies to certain notified goods which will be in addition to GST. GST cess is
also applicable on
imports.
[7]
E. Centripetal
Bias
Because
of improved efficiency and resource distribution at multiple places, all
conventional and non-traditional economic scholars feel that a federal system
is significantly superior to a centralized one. But what are the income and
function split between national and subnational governments? There is no
definitive solution to this question. There is an inherent centripetal tendency
in all federal countries, according to empirical evidence. Although no studies
on the cost, efficiency or welfare benefits of decentralization in India have
been conducted, no one can refute India's centripetal bias, which is based on
the Indian Constitution itself. All finance commission reports (which oversee
correcting horizontal and vertical imbalances as well as other improvements in
the fiscal system) plainly show that the states have been given more
responsibilities than income. Most experts point out that states' income only
covers 30 to 35 percent of their spending requirements, forcing them to rely on
central fund transfers and subsidies to even meet their revenue expenditure
demands, jeopardizing the states' fiscal autonomy.[8]
The
implementation of GST was envisioned to grant more funds to states as earlier
devolutions
although had increased as most central transfers were principally based and
thusautomatic but did not have a significant impact on states’ funds. It was
assumed that one nationone tax would help in reducing competitive federalism
which has resulted in the loss of 2.8% of revenue as a percentage of GDP
(Report of NIPFP) through various concessions andtax exemptions by states as
well as evasion of tax leading to higher incomes of the state.
F. Items
Barring Center-State Relations Under Gst Model
Ever
wondered why we get liquor in places like Goa orPuducherry for a lesser price
compared to your state or why people find it more cost-friendly for their
vehicle registration from another state instead of their own. It is because
some goods and services are having a bar on Center-State relations and are
having respective tax models for their states.
Likewise,
some goods do not attract GST as they are on the verge of control either by
respective state governments or under the central government, respectively.
The
items like Alcohol used for human consumption, Natural gas, Petrol, its
products, electricity, etc.
Overshadow Effect On GST In India
Now
alcohol, petrol, and diesel are not yet included in the GST because state
finance ministers have demanded it from the union's finance minister, claiming
that the high tax they earn comes from alcohol, petrol, and diesel. So,
including it on the GST list would have a significant impact on their tax
revenue.
In
addition, the cost of fuel in the province near the ports is comparable to the
cost of fuel in other parts of the country. Additional transportation costs and
national government service tax are included in this. These transportation
costs and state government services will have to be taxed on the shoulders of
the central government if they are listed in the GST but have not been
included.
Also,
because alcohol generates more revenue for provincial governments, it is
excluded. Some states, such as Tamil Nadu, Karnataka, Uttar Pradesh, and
others, have not taxed them under the GST scheme because they are their main
source of revenue.
List of Entries in Schedule III of the CGST Act
Schedule
III of the CGST Act covers duties or functions that may not be classified as
delivery of goods or the provision of services. There are now eight items in
Schedule III of the CGST Act, which are listed in the same order as the GST Act
and include additional information:
·
Employee Services under Employment Agreement
·
Services by Court or Tribunal
·
MP or Person in a constitutional post or
government post
·
Services about a deceased or Funeral and
related services
·
Sale of land and/or completed building
·
Actionable Claims except for Betting,
Gambling, Lottery, etc.
·
High Sea Sale or Sale from and to Non-taxable
territories or Third-country export
·
Merchant Trade supply
Even
though GST covers several things, there are still some exceptions. The GST Act
negative list is particularly important because it contains activities that are
not under GST. It is important to have a complete understanding of these items
to avoid charging the wrong GST for this purchase. It is also important to
understand what items are released in GST.
Conclusion
And Suggestions
The
researcher has attempted to study in detail the provisions of the GST, and how
it has impacted the revenue system of the country. It has specially focussed on
the impact on the central state relations of the fiscal relations, compensation,
etc. It has also analyzed the constitutional amendments and the hurdles to the
constitutional spirit due to the enactment of GST.
Implementation
of GST has not been exceptionally smooth despite a long negotiation history. In
the last three years 40 GST council meetings have been held, eighteen before
GST implementation and more than twenty-two after the implementation of GST. In
the meetings post-implementation, there have been various changes in
procedures, regulations, tax rates, fines, and refunds. The changing and
chopping of rates and regulations have created more problems than it has
solved. For example, between July 2018 and August 2019, the gap in compliance
with filing GSTR-3B has almost doubled. This gap in compliance has been created
because the reconciliation of information is not timely. It also delays refund
under input tax credit because of which compliance falls further which results
in the lower collection. This may be one of the causes why the funds collected
in 2018–19 are lesser in comparison to tax collections of 2017–18. Moreover,
the delays also create volatility in fund collection. It so happens that in some
months, GST collections drop to 80,000 crores while in some others it increases
to 1,08,000 crores creating problems of governance for states. A stable,
transparent GST system is basic for effective governance. Although there can be
a shortfall in the collection of GST, in exceptional circumstances such as
COVID-19 when the economy was locked down completely for 40 days. There can be
no explanation for declining GST collections in 2018– 19 and 2019–20 as
compared to 2017–18. The decrease also provides valuable information i.e., GST
which is a destination-based tax, and replaced VAT which was a production-based
tax has not affected different states differently as the decline in GST fund
collections is almost similar in all states.[9]
Some
suggestions to improve the center state relations concerning GST are:
? It is
true that there would be issues political, social as well as economic where the
Centre and states or states and states might have differences of opinions,
debates, or disputes but if they can be contained/negotiated purposefully then
naturally the optimal result could be achieved.
? Tax
effort has been poor because otherwise, the tax revenue could not have declined
as the tax base grew. So, one needs to analyze the reasons why tax effort has
slackened? The most important reason could be 1) noncompliance 2) policy
uncertainty and poor administration.
? The
government and GST Council should sit together to decide the exemption limit
thresholds (which are different) tax slabs, penalty and fines, and all other
issues. Any change if required shall be done only at the beginning of the
fiscal year and not in between.
? It is
especially important to change the tax slab or charge then all beneficiaries
shall be granted benefit and any fine up to that point of time shall be
withdrawn at once. Any dispute shall be settled within three months which would
enhance compliance and discourage policy uncertainty.
[2]Pandey Sumedha, Changing Paradigm of Centre State Financial
Relations in India with Special Reference to GST Good and Services Tax,
2021
[3] Ms. Joyline Clara, A Comparative Study of GST And VAT Tax Systems, IOSR Journal of
Business and Management
[5]Gupta, CA. Upender. “INTEGRATED GOODS AND SERVICES TAX (IGST).”
National Law School of India Review, vol. 28, no. 2, 2016, pp. 134–42,
[6] Jain, Shreya (2016),
“The Goods and Services (GST) Regime
through the lens of Fiscal Federalism in India”, Indian Law Institute, Law
Review,
[7]Pandey Sumedha, Changing Paradigm of Centre State Financial Relations in India with
Special Reference to GST Good
and Services Tax, 2021
[9]Pandey Sumedha, Changing Paradigm of Centre State Financial
Relations in India with Special Reference to GST Good and Services Tax,
2021