The withering of the States’ fiscal independence under GST strikes at the core of federalism

The new Goods and Services Tax (GST) regime, introduced by way of the 101st Constitutional Amendment, is based on a fundamental notion that uniformity in tax administration across the country is an idea worth cherishing. Indeed, the Union government has seemingly been so enthralled by its own enactment that it rolled out the tax on July 1 by organising an extraordinary midnight session of Parliament.

At its launch, Prime Minister Narendra Modi described the GST as a “good and simple tax”, and as a reform of far-reaching consequences that would help integrate India into a single market with a standard rate of taxation. That India could take such a step, he said, was an example in “cooperative federalism”. Or, as some others have described it, the GST is a product of a pooled sovereignty, where the States have voluntarily waived some of the critical fiscal powers that they hitherto enjoyed under the Constitution.

Denting fiscal autonomy

The rhetoric here can sound forceful. But much of this begs the question. For instance, we don’t know so far why uniformity in tax or the creation of a single market is necessarily a good thing for a country like India. We aren’t told how this will make us happier, or how it will enhance the causes of liberty and equality, the bedrocks on which our Constitution is built. What we do know, however, is rather damaging: that the GST, far from being a case of “cooperative federalism”, is really an incursion into the authority that India’s States have been permitted under the Constitution. The resultant withering of the States’ fiscal independence strikes at the core of the Constitution’s basic structure which the Supreme Court has held is inviolable.

The Constitution, as originally adopted, establishes a clear, federal arrangement. It prescribes two levels of government, one at the Centre and the other at each of the States. Although matters of national importance, such as foreign affairs and the defence of India, are assigned to the Union, the responsibilities placed on the States are also particularly salient. For instance, the power to legislate on public order, public health and sanitation, agriculture, water and land are all exclusively vested in the State governments. This authority, as Chief Justice Maurice Gwyer observed in the context of the division made under the Government of India Act, 1935, which the Constitution largely assumed, is no slight matter.

“We must again refer to the fundamental proposition… that Indian Legislatures within their own sphere have plenary powers of legislation as large and of the same nature as those of Parliament itself,” wrote Gwyer, in Bhola Prasad v. R. As the constitutional scholar H.M. Seervai has said, if Gwyer’s statements were true in 1942, when he wrote them, they are certainly true now, when we have State legislatures functioning under a system of Cabinet government.

Partners in taxation

In this constitutional scheme, where State governments are seen as equal partners, the founders thought it necessary to be very careful in allocating the powers of taxation. The partition made for this purpose was highly intricate, and they ensured that the taxes assigned to the Union and the States were mutually exclusive. For instance, while the Central government was given the power to tax income other than agricultural income, and levy indirect taxes in the form of customs and excise duties, State governments were given the sole power to tax the sale of goods and the entry of goods into a State.

This division of fiscal responsibility was made with a view to making States self-sufficient, and with a view to supplying to regional powers the flexibility needed to govern according to the respective needs of their people. The underlying idea here was that States should be uninhibited in tinkering taxation policies in whatever manner they desired so long as their laws conformed to the other constitutional diktats.

When resisting changes suggested to the draft Constitution in the Constituent Assembly, which demanded that the rates of sales tax be subject to parliamentary law, B.R. Ambedkar put it this way: “It seems to me that if we permit the sales tax to be levied by the provinces, then the provinces must be free to adjust the rate of the sales tax to the changing situation of the province, and, therefore, a ceiling from the Centre would be a great handicap in the working of the sales tax.”

Confusion over GST Council

The introduction of the GST, however, militates against this grand constitutional objective, against the aspiration set out in Article 1 of the Constitution, which declares India as a “Union of States”. In endeavouring to pursue the goal of creating a single market through a homogenisation of the tax regime, the amendment grants to both the Union and the State governments concomitant powers over nearly all indirect taxes. To further effectuate this effort, the law also creates a GST Council, which comprises the Union Finance Minister, the Union Minister of State in charge of revenue or finance, and the minister in charge of finance from each State government. In acting as a nodal agency of sorts, this council will recommend a number of things, among others the list of taxes that will be subsumed by the GST, the goods and services that will be exempt from the levy of tax, the rates at which tax shall be levied, and so forth. The council’s decisions will require a three-fourths majority, but the Central government’s votes will have a weightage of one-third of the total votes cast, according, thereby, to the Union a virtual veto.

Now, there’s some confusion over whether the GST Council’s decisions are actually binding on the various State governments. The newly introduced Article 279A, which creates the council, describes its decisions as “recommendations”, but it also grants the council the power to establish a mechanism to adjudicate any dispute that might arise between any of its members in implementing the recommendations. If the council’s recommendations are to be treated as purely advisory, it leaves us wondering why we need a dispute resolution mechanism at all.

Whichever way one wants to read the provisions of the new law, it’s clear that the amendment makes core changes to the fiscal division that the Constitution’s makers so meticulously devised. As a result, we could potentially have a scenario where one or the other of the States chooses to ignore the council’s advice, by levying additional tax not only on the sale of goods but also on services and manufacturing, subjects over which the Union enjoyed exclusive domain.

On the other hand, if these recommendations are treated as obligatory, we are left with a situation where States would have altogether surrendered their fiscal autonomy to the Central government. In such a case, a State would be barred from fashioning its laws in a manner befitting the necessities of its people.

India’s federal architecture is premised on a principle that promises the maintenance of an internal sovereignty, where States function as separate political entities within the domains allocated to them. But often the drive to maintain federalism, where the Constitution demands it, goes beyond any obligation to preserve the rights of the States. It goes to the root of the constraints against all arbitrary power, and, to that extent, this amendment is a grave onslaught on the Constitution’s basic structure.

Suhrith Parthasarathy is an advocate practising at the Madras High Court