Libertatem Magazine

GST: Anarchical Taxation Structure Challenging Fiscal Federalism

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Goods and Service Tax as the new indirect tax regime will re-institutionalize the present arrangement of indirect taxes. In the hitherto established framework, greater say of States pre-existed as the original scheme of the Constitutional mandate, but it seems that it will be minimized by the proposed setup of GST. GST is not an issue to be discussed as the UPA v. NDA regime or their rivalry per se, rather it is more on prominently to be conversed in terms of Central v. State establishment. Fiscal federalism was the major hint behind separation of tax structure in the India between Centre and the State, but this is not the original inception of problem hovering over GST. Rather, the notional extension of its success in addition to hesitation and uncertainty of intention are the major impasse to its enforceability in present socio-political environment of the country.

Constitutional amendments will subscribe more danger to the financial federalism as vagaries to it will be a tougher task in future, if GST model fails or in case of arbitrary governance by the GST Council, which will be a constitutional body as a matter of fact. Although GST cannot be rejected or criticized as bearing potential threat that it poses to the Indian taxation structure and henceforth moderately overlooking the provisions and their respective quandaries will retrieve the latent menaces that may prospectively be evoked. GST can be seen in two major ways; wherein former one enquires about its conceptual orientation and latter will be analyzed on the turf of structural constraints. One cannot argue that any challenging situation might arise out of the legislation at a pre-mature level and hence we could only rely on its circumstantial inevitability which seems to put a deleterious notion to “cooperative federalism” that it ostensibly serves.

GST as a comprehensive tax scheme conveys the abolition of various indirect taxes that were previously under the authority of Central and State governments, now transferring the same into Central Government’s authority as a single unit tax rate, procurement of which will then be divided among states in a prescribed ratio. Various Central taxes such as excise, service tax and the State levies such as sales, value-added, purchase, entertainment tax etc. will be levied on fixed rate known as GST or Integrated GST/IGST. GST being a fundamental change to our taxation policy needs more time and in depth concurrence to come into action.

If one contends that it is being discussed for past few years (as GST is originally an UPA initiative), then one must also consider some basic changes that have being taken place in The Constitutional (122nd Amendment) Bill, 2014 as compared to The Constitutional (115th Amendment) Bill, 2011. It doesn’t seem unwarranted to forward the Bill to a Select Committee as that would be a better approach for getting the recommendations in the present scheme of GST. GST will bring rigidity to the existing flexibility in the present scheme of original Constitution and hence it serves nothing but puts an impasse on certain basic features of federalism, where decentralization and fiscal liberty are some of them. Taxation is a part of the “Eminent Domain” and hence it is not just hampered when such power is interrupted but it also gets extinguished when there is a change in the center of flow of such power i.e. apparent in case of GST as power will now be centralized into the hand of Central Government.

The 2014 bill seeks to provide a compensation scheme up to five years as provided in Bill of 2014 but the reading of the said Bill gives an impression that the proportion will be decided by the GST Council. Hence, it remains contentious as to how the calculations provide for 100% compensation for first five years, 75% for fourth years and 50% compensation for loss of revenue for fifth year. Taking the authoritative challenges as constant, there is no light so far as to what will happen if the loss of revenue continues to happen after five years of which susceptibility is equally probable as of now or otherwise.

The recommendation of the Standing Committee on GST, 2013 has given a very logical finding that there must be a monitoring/evaluation cell that will assess the impact of GST upon GDP, inflation, hoarding etc., which was not incorporated in the present bill which again seems to be an unforeseen lacuna in the present model of GST. There have been similar recommendations by the said standing committee regarding imposition of floor rate which could serve as a better option to opt, as matter of course, providing cooperative federalism in place as making the system rigid and centrally powered could act as “obstinate federalism” which goes against the spirit of the Constitution. The decision in GST Council seems nevertheless to bypass the practical purpose it served but further it even infringes the inherent freedom of opinion that was previously in the hands of those states who might defer in the present GST system and hence the GST council will act as no more than an institutional invader of the fiscal federalism that was ruling and running the country in past decade.

Section 18(1) of The Constitutional (122nd Amendment) Bill, 2014 provides for an additional 1% tax that is to be levied for the first two years which may be extended as per the recommendations of the GST Council. It seems to be the major fault as it seems to be framed with a fraudulent prospectus or concocted future vision as the power to extend such additional tax is neither rigid nor explanatory except a possible profit for the producing state. If the intention of GST was to provide more proceeds to the consuming state in case of goods, then the whole system was to be reviewed rather than adding a life support to it in an unplanned manner.

Section 12 of the 2014 Bill will add “Article 279A” to the Constitution providing for constitution and functioning of the GST Council and through Section 12(11) of the Bill the GST Council is made into effect a dispute resolution body wherein adjudicatory role is being given to such authority. Further, there is no reference to the Supreme Court as the Apex Constitutional body unlike its predecessor Bill of 2011. However, merely changing the name doesn’t change the nature and wherever such adjudicatory function is accomplished the Supreme Court will always have supremacy and finality in the decisions. This misdemeanor will have an obvious impact on future business of the GST Council even if Supreme Court has sidelined itself from adjudicating on policy matters. But in no such case will of course reenter in name of inherency and sacrosanctity, the power of judicial review.

The Hon’ble Finance Minister has called GST as the “single biggest tax reform since independence”, but the ruling NDA Government will have to compete in the Rajya Sabha or Upper House where political statics are not in its favor unlike the Lok Sabha or Lower House wherein passage is definitely in the hands of majority government.

Therefore, on a concluding note, it must be analyzed that the shifting of the debate from political to the legal perspective reaps better and bearable result, otherwise GST will end up becoming nothing more than the “biggest flawed tax reform since independence”.

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