TABLE OF CONTENTS

Abstract ...................................................................................................................................... 2

Introduction ................................................................................................................................ 3

A brief history of Fiscal relations in India ................................................................................. 4

Advent of the GST ..................................................................................................................... 6

Fiscal Autonomy of the States ............................................................................................... 6

Destination based taxation ................................................................................................... 10

The third tier ......................................................................................................................... 10

Examining the structure of the 101st Amendment ................................................................... 11

The Composition of the GST Council ................................................................................. 11

Legislative Power of the Centre and States .......................................................................... 13

Dispute Resolution Clause ................................................................................................... 13

Centre-State Share in Decision Making ............................................................................... 15

Exemptions and Compensation ............................................................................................ 16

Comparative analysis with other federal nations ..................................................................... 17

Australia ............................................................................................................................... 17

Canada .................................................................................................................................. 18

Brazil .................................................................................................................................... 19

Conclusion ............................................................................................................................... 20
 ABSTRACT

The Goods and Services Tax regime rolled out on July 1, 2017, has been hailed as a sound

method of taxation, be it for reducing multiplicity of taxes, increasing access to input tax

credit or because of its equitable bent. Yet, many of thesame provisions have also come under

fire for possibly being violative of the federal structure of the constitution; including things

such as the fact that each state has one vote on the council regardless of whether it is

primarily a producing state or a manufacturing state, the union vote has 1/3rdweightage

versus 2/3rd for the states, non-entrenchment of the charging provision, lack of clarity

regarding dispute resolution, and so on. Federalism as a whole is intimately connected to the

question of fiscal power, for economic power is an essential power without which no

modicum of independence can be attributed to a constituent unit. The project attempts to

analyse the claims that have been raised against the GST and correspondingly, the 101st

amendment- to examine the extent to which GST abrogates the federal structure of the

country, if at all, and to examine whether there are any amendments that can be made to

ensure the economic efficacy of the model while not compromising the fiscal autonomy of the

states so as to prevent a systematic destruction of the federal structure of the country.

2
 INTRODUCTION

Taxation is a contentious issue in any federal polity, for it has often been considered a pre-
requisite to the concept of sovereignty, and is an important reflection of a country’s priorities
and political and ideological choices1. The issue of fiscal relations becomes more of a
conundrum, therefore, in a nation like India, where the precise extent of federalism itself has
been questioned. To recount the familiar debate aroundwhether India is truly federal in
nature, India’s structuring of centre-state relations has been variously characterised as a
quasi-federal2, a federation with a strong centralising tendency and a cooperative federation
by Austin. Birch defined co-operative federalism as the practise of administrative co-
operation between general and regional governments, the partial dependence of the regional
governments upon the payments from the central governments, and the fact that the general
governments, by the use of conditional grants, frequently promote developments in matters
which are constitutionally assigned to the regions.3By this definition, India has always been a
cooperative federation. What needs to be studied, therefore, is whether GST has added or
detracted to our characterisation as such. It is true that an exercise of consensus making
between the centre and the states of this large a scale has never been seen before. What will
the impact of this exercise of collaboration have on fiscal relations, and therefore on India’s
own unique form of federalism in the future? Amendments such as the 101st Constitutional
Amendment are often brought in at times when the political climes are such that there is near
homogeneity between those making decisions at the centre and those in the states. How will a
structure that was evolved in such a context, work over the years? All of these questions
necessitate a review of taxation power sharing in the past and the nature of our fiscal
federalism; a thorough assessment of the provisions of the 101st amendment; and an overview
of the nature of federalism in a few countries with similar structures, to draw inferences and
parallels and also recognise differences. Despite all the fanfare, there have been
unequivocally strong dissenters to the idea of GST for a variety of economic, sociological,
and federal concerns. However, not many have studied it primarily from the point of view of
the impact it has on the Constitutional structure and on federal relations as a whole, beyond
the initial and immediate teething problems. This paper seeks to achieve that objective.

1
Naren Prasad, Policies for redistribution: The use of taxes and social transfers (International Institute for
Labour Studies,DP/194/2008)
2
WHEARE, Federal Government, 48 All LJ 21 27-8 (1964)
3
A H BIRCH, FEDERALISM, FINANCE AND SOCIAL LEGISLATION IN CANADA, AUSTRALIA AND THE UNITED
STATES 305 (Oxford University Press, 1955)

3
 A BRIEF HISTORY OF FISCALRELATIONS IN INDIA

The model of fiscal federalism that India adopted post-independence was largely based on the

one that was envisioned in the Government of India Act, 1935. A clear separation between

the taxing powers was considered to be of utmost importance to prevent any incidental

entrenchment into the other’s sovereignty, and hence, the taxation powers of the centre and

the state were clearly demarcated in the Union and State list of the Seventh Schedule with no

matter left to the concurrent list.Like the act, independent India also gave the power to tax the

sale of goods to the States, whereas excise tax, which meant tax on manufacture; and all

direct taxationwas left to the Centre. Further, the residuary powers provision in the Central

List, Entry 92 C; meant that all services could also only be taxed by the Centre. Some of the

items assigned to the states included agricultural income tax and estate duty. However, in

practice, the States found taxing agriculturalincomes politically infeasible besides being

administratively difficult and these have hardly added to the revenue of the States.4 In 1985,

estates tax too were abolished. These factors culminated in the result that sales tax was almost

the sole, and definitely the primary way in which states could generate revenue; illustrating

how fiscal federalism in India has always had a heavy centripetal bias.

In 1986, MODVAT or Modified Value Added Tax was introducedat the union level, to allow

manufacturers to get reimbursements for excise duties paid. Around 2000, this was

rechristened to the CENVAT and State Specific Value Added Tax was introduced in 21 states

in 2005. This State VAT was collected by the State Commercial Tax Departments, and would

be levied on the sale of goods. Each state could decide the rate of VAT for a particular good

according to its policy objectives. Inter-state sales were taxed through the CST or the Central

Sales Tax, levied by the Centre but collected and retained by the states. This was an origin-

based system, where the tax was collected by the state that manufactured the product, rather

4
M Govinda Rao & R Kavita Rao, Trends and Issues in Tax Policy and Reform in India (National Institute of
Public Finance and Policy 2005).

4
than the one in which the sale was eventually made to the final consumer.Meanwhile, the

CENVAT continued to operate as a tax on manufacture, and was uniform for all states. This

change significantly reduced the taxation of inputs and the associateddistortion.5

Under the sphere of activities allotted, states spend more than half of the total combined

expenditure while collecting around one-third of revenue. The difference is largely met by

mandated transfers of union tax revenue to states. Thus, the states' own tax revenue

constitutes only around 60-64% of their total tax revenue6, the rest being transfers from union

government tax revenue as per the formula of the Finance Commission. The 80th Amendment

to the Constitution of India resulted in making all inter-state commerce that is taxed by the

Centre recoverable by the States and the 88th amendment also made a majority of the Central

taxes shareable. Although population, backwardness, area, level of fiscal responsibility, and

so on, have been factors in the determination of horizontal transfers, income distance- defined

as the gap between the states GDP and the highest SGDP has been the dominant

consideration. The Twelfth Finance Commission emphasised that there have been attempts at

evolving a formula that balances equity and fiscal efficiency; but ‘equity considerations

dominate as they should, in any scheme of federal transfers trying to implement the

equalisation principle.’7The system of taxation only constitutes a portion of what the state

ultimately gets to spend, for under Article 2758, the Centre provides fiscal need grants to

states’ that need the same, the exact purview of this ‘need’ going undefined. In addition, there

are specific purpose grants, fixed by the Parliament every five years. Thus, the Centre has

always had a certain level of discretion over the spending capacities of the states’ in this

indirect manner.

5
Arvind Panagariya, India in the 1980s and 1990s: A Triumph of Reforms(WP 04/43).
6
Praveen Kishore, Administering Goods and Services Tax in India: Reforming the Institutional Architecture and
Redesigning Revenue Agencies, EPW (Dec. 2012).
7
Report of the Twelfth Finance Commission of India, (2005-10) November 2004.
8
INDIA CONST. (1950)art. 275

5
 ADVENT OF THE GST

The 101st Amendment to the Indian Constitutionwhich received the President’s assent on 8th

September 2016, radically altered the nature of fiscal relations in India. The constitutional

history of keeping the spheres of taxation isolated from each other was changed to a scheme

where the Union and the States would have concurrent powers of legislation on taxation of

goods and services. The unified GST consists of three separate levies: CGST (Central Goods

and Services Tax), SGST (State Goods and Services Tax), and IGST (Inter-State Goods and

Services Tax); and therefore, two Acts of Parliament, as well Sate GST legislations based on

the Model Law, have been made in addition to the Constitutional Amendment. This dual

system has meant that instead of being a way to collect national taxes and then distribute it

amongst states as in some GST regimes, there is a split structure, so that each state gets its

own share. Despite this change from the standard GST model in most other countries, which

was attempted to allay fears of centralisation, a number of concerns still remain.

Fiscal Autonomy of the States

Seervai has remarked that“The taxing powers of the Union and the States have been made

mutually exclusive so that Parliament cannot deprive the States of their taxing powers as has

happened in countries where the powers of taxation are concurrent”9Reservations like the

ones expressed above, of course, do not imply that there must be no innovation in the

Constitutional scheme if necessitated by the demands of the time, economic system and

efficiency. However, it is vital to keep in mind that an amendment of this scale, must be

subjected to the utmost scrutiny to ensure that the legitimate and well-founded fears above,

do not materialise.

GST would subsumeCENVAT; service tax; central excise duty;service tax; additional

customs duty; both central and state surcharges and cesses; state VAT; state sales tax;

9
3, HM SEERVAI, CONSTITUTIONAL LAW OF INDIA 2607 (4th ed. 2015)

6
entertainment tax not levied by local bodies; luxury tax; lottery, betting, and gambling; and

entry tax not levied by local bodies. Some of the main economic advantages of this are said to

be a prevention of the cascading effect of taxation, reducing tax evasion, and decreasing

compliance costs. The ambit of this project, however, is not to assess the efficacy of the GST

regime as an economic measure, but to examine its overall impact on the nature of federalism

in India, and especially if there can conceivably be an acceptable balance between fiscal

autonomy and tax harmonisation.

Since the states do not have any power over taxation of services at present, many have seen

the GST as a correction in the vertical imbalance of power, for services too, would now come

under this joint ambit of taxation. The Thirteenth Finance Commission was a staunch

supporter of this view, since the expansion in the power of the states the reform brings is

significantly larger than the Centre’s, (Services being 54% of the GDP and land tax being

10%).

To assess this proposition, it is important to understand that much of the debate surrounding

fiscal federalism revolves around which objectives the nation chooses to emphasise. Broadly,

there are three essential aspects to fiscal federalism; which body decides the goods on which

the taxes are to be levied and the rates; which body imposes them; and subsequently, how the

revenue thus collected is distributed between the centre and the states. If simplified, there are

two views to consider: firstly, that the fiscal compact itself means that citizens should not

suffer for being a member of the less resource rich or fiscally backward region; and that it is,

either through vertical redistribution or horizontal, one of the overarching goals of a federal

nation to ensure that fiscal relations are based on equitable principles. It has been argued that

otherwise, the fiscal pressure in poor states would provide an incentive for highly skilled

7
professionals to migrate to richer states, as they are tax conscious.10 A system of fiscal

relations structured upon equity, that aims a limited form of redistribution could help correct

that. The other, equally supported view is that without a sense of healthy competition, states

are not accountable, and a system of grants and equalisation can severely compromise

economic efficiency. Further, a majority of the state’s revenues in India, arise from Sales Tax

and VAT. For instance, for the year 2016-17, these two components were 78.66% of Kerala’s

revenue. Stamp fees on various instruments, widely touted as one of the revenue

opportunities that are still left to the discretion of the state, only account for around 7-12% of

a states’ own tax revenue; as data from a few states in 2016 shows: 11% in Tamil Nadu, 7.9%

in Rajasthan, and 3.4% in Tripura.

The indirect effect on powers of policy formulation

Under this system, the GST rates adopted have been adjusted such that they are largely

Revenue Neutral; and the impact on consumers has been moderated by the fact that differing

tax bands have been adopted. Thus, it may perhaps be true that the revenue collected will

increase and be allocated to the state. However, under this system; the state has no right to

choose which goods to incentivise consumption of and which goods to de-incentivise. While

the larger scheme has taken care of demerit goods like tobacco by taxing them at an ultra-

luxurious rate of 28% at present; this does not compensate for the fact that since a majority of

the State’s revenue is made up of the sales tax component, states’ fear that the only lever of

macroeconomic policy available to them has been lost; thereby compromising fiscal

autonomy in an irreparable way. Fiscal policies affect the level and pattern of economic

activity in a state; and not having power over this, means that an elected state government has

a more restricted scope than ever before. When a state cannot make long term policy plans

based on its own rates of taxation, as they are susceptible to be altered by a GST Council

10
Buchanan JM, “Federalism and Fiscal Equity” American Economic Review (September 1950).

8
decision, accountability is low and the level of initiative voluntarily taken, too, would

decline. Taxation affects growth prospects as well as income distribution in important ways.

The means by which public resources are mobilised, and the extent to which they are

increased, affects the income of different sections of the society and the ability of the

government to spend11. A particular industry may be of immense importance to one state,

while not being equally valued in another. A state may wish to protect an industry, say, a

traditional handloom industry and reduce the taxes on those goods. Earlier, a state could do

this unilaterally in the VAT system. However, now, only the GST council can change a rate;

and the rate then changes for every state. Taxation systems have always been inextricably

linked to policy making. Therefore, it is worth noting that the current GST system, would

restrict the ability of the elected government in a state to change taxation rates on certain

goods to fund the provision of other important public goods or social welfare schemes. Apart

from the centrally sponsored schemes that the state government has to contribute to, elected

governments reserve the right to formulate their own such policy initiatives; be it the Amma

Canteens in Tamil Nadu under Jayalalithaa or the ‘Kanya Vidya Dhan’ scheme in Uttar

Pradesh, waiver of farmer’s loans, and so on. The entire federal set-up of India envisions a

minimal level of political autonomy and responsiveness to the citizens’ needs and demands.

States would also be able to defer responsibility for fiscal management and distribution of

public goods by simply taking the defence of not having control over the way in which taxes

are administered. Under Article 293(1) of the Constitution, the executive power of the states

extends to borrowing within India upon the security of its consolidated fund within the limits

fixed by the State Legislature itself. A utilitarian argument against taking away the power of

the states to decide revenue rates, is that it may increase borrowing to unreasonable amounts

to be able to fund the policies on which they’ve fought elections and to fulfil promises to the

11
Jayati Ghosh, Macroeconomic and Growth Policies, (Centre for Economic Studies and Planning, School of
Social Sciences, JNU).

9
people. There is no doubt, amongst both supporters and detractors, that some of the states’

policy making functions, grant of subsidies, and so on, will be affected 12. The major counter

to this loss of autonomy being presented as a negative, is that states’ have used this power in

ways that have only increased inter-regional disparities while not achieving economic

efficiency either, as rising revenue deficits testify to.

Destination based taxation

The new system of GST levies the tax on consumption, and not on production. This means

that when it comes to inter-state sale of goods, the tax will be received by the state in which

the consumer took the benefit of the good or the service. This has meant a considerable

amount of dissent by the producing or ‘manufacturing states’ and feel that their tax revenues

would drop as a result. One of the fears, therefore, is that states may not feel inclined to

incentivise investment and production within their territories.13 States like Maharashtra and

Tamil Nadu have repeatedly expressed their dissatisfaction with this form of taxation as they

feel that the state receives a disproportionately small amount herein.

The third tier

Even after decentralisation through the 73rd and 74th amendment, local bodies had woefully

inadequate funding. In effect, they merely undertook 'agency" functions on behalf of the

States and were heavily dependent on them for financing their expenditures. The GST system

has ensured that local bodies and municipalities that carry out the bulk of the ground level

work in the states, can still continue to impose entertainment tax and other small levies.

Unlike before, they would be less dependent on the State legislature to carve out a specific

portion for them. In principle it is a victory for grassroot level federalism, making it one of

the few positive federal features of the GST. Fiscal decentralisation especially up to such a

12
Sacchidananda Mukherjee, PresentState of Goods and Services Tax (GST) Reform in India
(Working Paper No. 154 2015).
13
VENKATARAMAN 1965, DATTA 1984.

10
local level strengthens the people’s control over public services, makes representatives

accountable, and increases representation as well as civil society engagement.

EXAMINING THE STRUCTURE OF THE 101ST AMENDMENT

The 73rd Standing committee on Finance, while dealing with the precursor bill to the GST as

has been passed now, the 115th Constitutional Amendment Bill stated that ‘special provisions

would have to be made keeping in mind the quasi-federal nature of the Indian Polity’ 14
This

seems to be very evident in the structuring of the provisions in the 101st amendment.

The Composition of the GST Council

The GST Council shall be composed of the Executive at the Centre and the States. Headed by

the Union Minister of State, it will have the Union Minister of State in charge of Revenue or

Finance as a member, and a Minister appointed from each state government.

Article 279A15 is the Article that lays down the composition of the GST Council, the nature

of its duties and the scope of its actions. The GST council’s composition of the council in the

constitution itself instead of leaving the subject of its composition to be decided by the

Parliament, unlike the case with Article 307 which provides for the setting up of an authority

as considered appropriate by the Parliament to carry out the purposes of Articles 301-304 that

deal with the power to impose restrictions on the freedom of trade and commerce. This

setting up as a constitutional body is a welcome move, and to this extent, the provision has

aimed to maintain a level of specificity to prevent the centre-state body from becoming

unrepresentative of the nation’s interests. A line of argument that has been taken, albeit

without not much support, is that having one member from each state doesn’t adequately

14
Seventy Third Report of the Standing Committee on Finance (2012-2013) (Presented to Lok Sabha on 7
August, 2013).

15
INDIA CONST(1950) art. (279A)

11
reflect the population or fiscal contribution of the states; and a Rajya Sabha like system may

have been more rightly representative. However, given the nature of Indian federal polity

where every state is to be seen at an equal footing, the present system inarguably is more

suitable.

The major concerns however, stem from the fact that the amendment is coupled with many

seeming infirmities in wording, which may arguably have been undertaken to ensure that

there is scope for adaptability. Yet, when it comes to an over-arching reform of this sort, most

would say that any and all ambiguity is counterproductive.

One of the primary problems in the Constitutional Amendment is that it talks

about‘recommendations’ made by the Council in Article 246, 269A, 279A (4), but uses the

term ‘decision’ in 279A (9). This raises a confusing question- the purpose behind the

amendment is to replace the existing taxation regime by a single unified tax regime

(comprising the CGST, SGST, and IGST). Since the objective is an overhaul of the system in

which taxes are imposed, and the relevant entries in the seventh schedule that allowed the

previous taxation system to operate have been removed and amended; if the GST Council’s

decisions are held to be purely recommendatory in nature, then, there would be no restrictive

mechanism stopping States, or the Centre, enacting taxation statutes under Article 246A with

respect to both goods and services, with any rates that they wish. Clearly, this could not have

been the legislative intent behind the act, and the Council’s decisions must have binding

force. This is also evidenced by the fact that a provision has been made for a dispute

settlement mechanism under Clause 11. Clause 4 of the Article mentions the

recommendations that the GST Council shall make to the Union and the States. This Article

grants the GST Council power to ‘make recommendations’ on every matter related to the

Goods and Services Tax. At this juncture, it is critical to note that because of the extensive

number of previous taxes that it has subsumed within itself, the Goods and Services tax

12
makes up an overwhelming majority of the indirect taxation potential of the country; and this

clause grants the GST Council the power to decide all issues related to it. The GST is a

sudden change in the entire taxation structure of the country, arguably the backbone of all

administrative action. It is therefore, a subject that cannot be dealt with in vague and

uncertain terms.

Legislative Power of the Centre and States

Article 246A gives the Parliament and the States concurrent power to legislate with respect to

taxation on goods and services, and mentions that this is notwithstanding anything given in

Article 246, and Article 254 (that deals with repugnancy). Given that this is a concurrent

power, would any dispute arising thereof as to legislative competency be covered by the

doctrine of repugnancy as applied to items in List III? If this is so, this would mean

parliamentary supremacy over almost complete fiscal power of the states; which has been

constitutionally impermissible and seems to violate the basic structure. Of course, given the

separation of CGST and SGST, the likelihood of direct conflict is low, but if the eventuality

arises, there is a potentially high risk of subversion of federal principles completely.

Dispute Resolution Clause

The dispute resolution clause is the second biggest cause for ambiguity; as it is phrased in a

way very similar to Article 131 (defining the ambit of the original jurisdiction of the Supreme

Court) in defining the ambit of the disputes the mechanism evolved it will be allowed to

adjudicate upon. It provides that a mechanism shall be evolved to adjudicate any dispute

between, the Centre and the States, between the States, or between the Government and some

States on one side against another state or group of States that arises out of the

recommendations of the Council or implementation thereof.

13
Does the authority of this mechanism preclude that of the Supreme Court to the extent of

GST related matters? Unlike Article 262 that relates to adjudication of Inter State River

Water Disputes, which specifies in clause 2 that Parliament can by law, ensure that the

Supreme Court does not exercise its jurisdiction over the dispute; Article 279 A (11) does not

explicitly grant any such power. This raises a host of questions.

1. Does this mean that the dispute settlement mechanism is the sole and final authority,

or can an appeal lie outside it, to the ordinary civil court system?

2. In the absence of such clarity, are the ‘recommendations’ of the GST Council not of a

binding nature, akin to those of an Inter-State Council set up under Article 263?

As Article 131 makes the jurisdiction of the Supreme Court subject to the provisions of the

constitution, and therefore, this yet to be evolved authority could impliedly be beyond

jurisdiction. Given the gravity of the subject matter it decides upon, it is hard to assume that

this lack of clarity is intentional. In effect, the GST Council has been given the power to

adjudicate upon disputes arising out of it’s decisions. This has been taken in two ways by

commentators. Some feel that this is an extension of the democratic principle, for if the

proposition that the GST Council is truly federal is accepted, then, all the states are getting to

decide what sort of mechanism and what rules will govern the potential dispute. However,

another way to interpret the provision has been to question whether this is a violation of nemo

judex in causa sua. If a dispute has arisen out of the voting process- as it stands to reason the

case will be in most disputes; the majority therein may be the same majority that decided the

procedures, rules, and forum of the dispute resolution mechanism. This seems contrary to

Constitutional Principles- for every structure evolved by the Constitution that has the power

to make decisions is constrained by another authority; even when it comes to the three organs

of the Government, the Legislature, the Executive and the Judiciary. If the GST Council sets

up the adjudicatory body that precludes judicial review, it would be hard to ensure that some

14
states do not benefit unduly while others suffer. However, exposing such a body to judicial

review may encroach upon the fiscal functions of the legislative wing.

Solution: Setting up a tribunal under Article 323A or 323B, or wording similar to that of the

Inter-State River Water Tribunal article. Further, the previous draft of GST bill had included

the provision for a GST Dispute Settlement Authority, which had much more clearly

delineated powers than the present yet to be set up body does. Unlike this body, that could be

a panel, a tribunal or an elected body, the GST DSA had a specific structure and a similar

body must be created at present as well. Article 101 of the Australian Constitution creates an

Inter State Commission, which has such powers as the Parliament deems fit for maintenance

and execution for any trade and commerce related matter, including the modalities of its

GST. This sets up a third adjudicatory body independent of the one that decides the rate of

taxation.

Centre-State Share in Decision Making

Clause 9 of Article 279A provides that every decision of the GST Council would be taken by

not less than 3/4th of the votes of those present and voting. The crucial part of this otherwise

innocuous provision is that it provides that the vote of the Central Government would have

the weightage of one-third of the votes proposed, giving it 33.3% of the vote-share. This

clearly makes it impossible for the GST Council to take a decision without the concurrence of

the Union. The Parliamentary Committee examining the provision stated that: “The present

weightage of votes in the GST Council would ensure that neither the Centre nor the States are

able to take a decision without the support of the other. In other words, both would enjoy a

veto” 16
The fundamental problem with the simplification made by the Committee, is that it

seems to group all the states together, to consider them as a similarly voting bloc, which is

16
Report of the Select Committee on The Constitution (122 nd Amendment) (Bill presented to the Rajya Sabha
on 22nd July, 2015).

15
counterintuitive knowing the nature of Indian federalism and the great diversity prevalent

herein. By doing so, it disregards the fact that an individual state, or four or five states have

very little proportionate voting power to make a difference in the Council’s decision- and

therefore, it is incorrect to say that both enjoy a veto. This principle, effectively makes the

Centre’s approval a necessary condition for any taxation measure that a state wishes to

undertake; and is contrary to years of settled understanding of Indian federalism. Noteworthy

judgements on taxation, even up until as recently as 2016 in Jindal Stainless Steel17 have

stated that to make union assent mandatory for a state tax, an idea would stand against the

federal principle of the Constitution. Thus, it is clear that the GST has meant a fundamental

and drastic shift in the idea of federalism, to a much more restricted understanding of the

powers of a state. Even the Task force on GST18 submitting it’s report in 2013 had stated that

any change in the structure of the GST (both base and the rates) should be allowedto be

carried out only if the Chairman and two-thirds of the State Finance Ministers agree to doso.

Under the present 3/4th majority where the centre has 1/3rd of the vote; rates can be changed

even if less than 2/3rds of the state concur; and a mere 44.4 % of the vote would suffice;

meaning that even if only 12 of the 29 states agree but the central government supports a

change, it would pass. Thus, this amendment clearly has a greater centripetal biaswhen it

comes to decision making power, even as compared to the earlier version of the GST bill.

Exemptions and Compensation

At present, natural gas, aviation fuel, and petroleum products are exempt from the GST,

keeping in mind the fact that a large part of the states’ revenue comes from these sources.

However, unlike the exemption for alcoholic liquor, this exemption is not a part of the 101 st

amendment and is merely implicit; and is to be introduced later. The compensation clause

17
Jindal Stainless Steel Ltd v State of Haryana 2017 12 SCC 1.
18
Report of the Task Force on GST, Thirteenth Finance Commission of India, (15 th Dec. 2009).

16
provides for 5 years payment to the states to offset any losses. This seems like too ad-hoc a

measure.

COMPARATIVE ANALYSIS: OTHER FEDERAL NATIONS

Australia

Australia introduced GST on 1 July 2000 to replace anumber of existing indirect taxes. The

units of Australian federalism are six former colonies: Queensland, New South Wales,

Tanzania, Victoria, Western Australia, South Australia and the two territories. These are very

heterogenous in terms of population and land area, but are more homogenous than possibly

any other federation in terms of their GDP.19

Contrary to India, the introduction of GST In Australia did not necessitate an amendment of

the Constitution; but was introduced through a singular legislation called the Commonwealth

State Financial Arrangements Act 1999. Under this system that imposed a single unified rate

of GST at ten percent, the Centre would collect all the taxes subsumed within and then

distribute to the states. This was to be done in consonance with the principle of horizontal

fiscal equalization; according to a formula set out in the Act itself. This may be because of

the fact that the fiscal capabilities of the states differ very little. Even therein, the states have

felt that the equalisation policy disproportionately benefits Western Australia and are

beginning to demand reforms.20 In contrast, the system in India envisions a dual GST,

whereby each state gets the portion accrued to it. In Australia, the whole scheme is overseen

by a Ministerial Council comprising Treasurers of the Commonwealth, States and Territories,

similar to the GST Council in India. Clearly, India has maintained the fiscal autonomy of the

20
Paul Karp, States demand tax freedom as Coalition braces for GST carve-up fight(Jan. 9 2018, 10:59 AM)
https://www.theguardian.com/australia-news/2018/jan/10/states-demand-tax-freedom-as-coalition-braces-for-
gst-carve-up-fight

17
States’ at a much higher pedestal than that in Australia, as a system of direct horizontal

equalisation as attempted there would be impossible to implement in India given the disparity

in GDP’s. However, one of the more federalism protecting features that it has is that the GST

rate cannot be amended without the consent of each state, in clear contrast to India. The

differences in this stem also from the fact that India has a much larger number of states where

decision making by consensus may be much tougher to implement. Here, it may be noted,

though, that the 115th amendment had originally envisioned decision making by consensus;

and it is a question worth exploring by constitutional lawyers and economists both, as to

whether the inconvenience of reaching this consensus would have been worth it’s weight in

preserving a higher standard of state autonomy.

Canada

The British North America Act (Constitution Act) 1867 is silent on intergovernmental fiscal

matters, except that ss. 114-117 set out the liabilities of the centre and the provinces for their

public debts at Confederation.

Canada imposes a five percent federal value-added tax called the goods and services tax

(GST), which applies to the supply of most goods and services in Canada and to imports of

most goods into Canada. Five Canadian provinces (Ontario, Nova Scotia, New Brunswick,

Prince Edward Island, and Newfoundland and Labrador) have harmonized their provincial

sales taxes with the federal GST to make a single harmonized sales tax (HST), which is

collected by a Central Revenue Agency and then divided amongst the states.

The government of Quebec, the largest territory administers both the GST and the Federal

Tax, and remits some of it to the Centre. British Columbia, Manitoba, and Saskatchewan

continue to impose a separate sales tax at the retail level only. Alberta is the exception, not

imposing a provincial sales tax. This differentiation in fiscal powers between states finds no

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parallel in India. The Indian GST system is closest to the HST, but is different in that tax

bands have been adopted instead of a single unified rate of HST (15% at present). While the

system has largely worked, it is quite evident that even Canada has not been able to

implement a unified regime completely. Even if Quebec is left out of the consideration given

its quasi-federal nature, the fact that British Colombia adopted and then rejected the HST

show that problems still remain. The provinces have pointed out that, while the Constitution

grants the provinces “access” to most tax fields, simultaneous occupation of these tax fields

by the two orders of government poses very severe political and economic constraints on a

government’s ability to raise taxes unilaterally; and theoretical access is of no use for

funding. Although India, too has introduced concurrent powers of taxation on goods and

services under the new regime, it is hoped that the SGST, CGST break-up shall ensure that

concurrence doesn’t come to mean parliamentary supremacy.

Brazil

In many ways, Brazil is very similar to India in that Brazil is a three-tiered federation of 24

states, two federal territories, a federal district, and 4,300 municipalities. In 1989 less than
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half of all government spending was controlled by the federal government. Brazil

therefore has a dual structure, which is administered independently, creating too many

differences in tax rates that weakens compliance and makes inter-state transactions difficult

to tax. The experience in countries like Brazil and Malaysia, therefore shows that federal

concerns may often hamper the economic efficiency of the proposed tax reform.

21
Anwar Shah, The New Fiscal Federalism in Brazil (The World Bank, WPS 557, Dec. 1990).

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 CONCLUSION

An overall analysis of the Goods and Services Tax regime in India makes it clear that a great
deal of effort and deliberation has gone into making sure that the change in taxation system
does not abrogate the principle of federalism. When compared to other federal nations with
GST, it seems to be a somewhat more stable structure. However, the concerns that are
highlighted in the project above show that essentially, there is a certain level of erosion of the
states’ control over their fiscal policy, despite safeguards.

Fiscal federalism in India has always been somewhat vertically oriented, and this move seems
to accentuate that inversion. India seems to be embracing the notion of inter-regional
economic equality in principle with this destination-based system, even if less radically than
in nations like Australia. It is argued, therefore, that in line with the fact that India is a
federation with a strong centralist tilt, the overhaul in tax structure is not constitutionally
impermissible. Further, research has shown that in many developing countries,
decentralisation does not yield any significant economic or social benefits; and therefore, the
pressing need for such a change is justified. The GST regime has also ensured a certain level
of independence to local bodies, and in this way, it does embody the spirit of local
federalism, right up to the grassroots.

Yet, it is to be noted that acceptance of the idea need not imply acceptance of the modalities
of the Constitutional changes made in its pursuance. Despite its admirable objectives, the
101st amendment leaves a lot to be desired; and ambiguity in the Constitutional provisions is
not merely a theoretical flaw, but leaves the federal structure open to being systematically
dismantled with the sanction of law. The ‘recommendatory’ nature of the GST Council, the
central veto in decision making, and the ambiguity in the dispute resolution process are the
foremost amongst those concerns. It is suggested that a further amendment resolve the
paradox in stating that the GST shall make only recommendations, and in providing for a
redressal mechanism against it’s decisions, that the central veto power be reconsidered; and at
the very least, the GST Dispute Resolution Authority be made a Constitutional body with
clarity on whether or not an appeal may lie to the judiciary. The concurrent legislative power

20
should ideally come with its own proviso’s instead of following the general approach on
legislative relations to accommodate for the fact that such power outside of the lists has ever
been granted before, and could potentially lead to constitutional struggle.

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