Exam = UPSC IES / ISS
Paper = Indian Economics
Answer
GST is a complex and controversial topic that has implications for India's fiscal federalism. Fiscal federalism is the division of financial powers and responsibilities between different levels of government, such as the Centre and the states. In India, fiscal federalism is governed by the constitutional provisions, the Finance Commission, and various laws and policies.
GST is a unified indirect tax system that replaced multiple taxes levied by the Centre and the states, such as excise duty, service tax, VAT, etc. GST was introduced in 2017 with the aim of simplifying the tax structure, broadening the tax base, improving compliance, reducing tax evasion, and enhancing transparency. GST also enabled the creation of a common national market and reduced the cascading effect of taxes.
However, GST also had some drawbacks and challenges for India's fiscal federalism. One of the main criticisms of GST is that it has curtailed the financial powers of the states. This is because:
GST has taken away much of the autonomy available to states and has made the country’s indirect tax regime unitary in nature.
After the introduction of GST, state governments lost their independent taxation powers. Liquor and fuel are the only two significant avenues left for states to generate their own tax revenues, without having to seek approval from the Union government, since they are outside the GST regime.
India’s GST is precariously held together by the loose thread of "compensation guarantee", under which states surrendered their fiscal powers in return for guaranteed revenues for the first five years of GST implementation. However, due to the economic slowdown and the COVID-19 pandemic, the GST collections have fallen short of expectations, leading to a compensation crisis between the Centre and the states.
The decision-making structure of the GST Council, which comprises of representatives from the Centre and the states, has also been questioned for its lack of transparency, accountability, and consensus-building. The Centre has a dominant role in the Council, as it has one-third of the votes and can veto any decision. Moreover, some states have alleged that the Council has not been functioning as a democratic and cooperative forum, but rather as a rubber stamp for the Centre's decisions.
Therefore, it can be argued that GST has indeed curtailed the financial powers of the states under fiscal federalism. However, it can also be said that GST has some potential benefits for fiscal federalism in the long run, such as:
GST can increase the overall tax revenue of both the Centre and the states, as it widens the tax base, improves compliance, reduces evasion, and eliminates distortions. This can enable more resources for public expenditure on welfare schemes, infrastructure, health, education, etc.
GST can foster cooperative federalism among the Centre and the states, as it requires regular consultation and coordination on various issues related to tax administration, policy-making, dispute resolution, etc. The GST Council can act as a platform for dialogue and consensus-building among different stakeholders.
GST can promote competitive federalism among the states, as it creates a level playing field for trade and commerce across India. The states can compete with each other on factors such as ease of doing business, quality of governance, human development indicators, etc., rather than on differential tax rates.