Preemptive move

Before such a view could gain ground, the government moved in to pre-empt the development. ‘The SC ruling will not materially impact the one-nation-one-tax regime, as it is only a reiteration of the existing law that gives states the right to accept or reject the panel’s recommendation on taxation -- a power that none has exercised in the last five years,” remarks Tarun Bajaj, Union revenue secretary.

The Constitutional amendment that brought the GST regime in July 2017 by subsuming nearly one-and-a-half-dozen Central and state levies, provided for a Council of Centre and states for decision-making. The recommendations of the GST Council, as per the Constitutional amendment, were always guidance and never mandatory compliance.

The Centre believes that, while it may be tempting for some states to break out and legislate on their own, in the long run, such an act will only work against their own interests, besides causing avoidable chaos for tax-payers. Bajaj points out that states, though differing on tax rates on a particular good or service in the Council, never went back and framed legislation that was not in line with the panel’s recommendations.

And this practice is likely to continue unhindered. The view is endorsed by other experts, including Haseeb Drabu, former finance minister of Jammu & Kashmir. The notion that the SC ruling alters the nature of fiscal federalism is misplaced, he points out.

That said, though only five years have lapsed since its introduction, it may be time already for reform of the GST. A number of outstanding issues need to be resolved in the spirit of statesmanship at the GST Council. For instance, the GST rate rationalisation exercise, which has been put on hold because of inflationary pressure and geopolitical tensions, has to be finalised.

Fewer slabs would mean that GST on some items could go up, which could make goods expensive at a time when consumer inflation has touched an eight-year high of 7.79 per cent.

The GST Council is likely to meet in June. It’s expected to take up the report of a group, headed by Conrad Sangma, CM, Meghalaya, which is reported to favour the highest 28 per cent rate on online gaming, racing and casinos. The Council is also expected to discuss integrated GST on ocean freight, now struck down by the Supreme Court.

The Council had set up another group last year headed by Basavaraj Bommai, CM, Karnataka, to suggest changes to the GST rate structure. It was tasked with suggesting rate changes to correct inverted duty structures and also to reduce the number of GST slabs from the existing 5 per cent, 12 per cent, 18 per cent and 28 per cent to just three. 

But there are larger issues at stake, which can be dealt with immediately. Drabu feels that dispute resolution tribunals should be set up by the Council. Perhaps, if such a mechanism has existed, the present controversy would not have arisen in the first place.

Persuasive powers

Then there is the issue of genuine federalism thrown up by the ruling. Ajit Ranade, economist, feels that the apex court has rightly observed that the GST Council has persuasive powers, not coercive ones. The verdict is a reminder, if any was needed, that co-operative federalism calls for more and frequent dialogue at the highest level of the Inter-State Council, and not merely at the GST Council level. 

The Council is still an inadequate mechanism to balance sensitivities over the taxation rights of the Centre and states. But there are also various other issues involving federalism that can turn into fault lines. For instance, the exercise of constituency delimitation and a proposed increase in parliamentary seats in the light of India’s changing demographic profile both call for urgent attention.

Another issue is the need to put a legislative cap on the Union government’s tendency to resort to using cess revenues that are kept outsidethe divisible pool of taxes. A third issue could be of the expanding use of Central agencies in police matters, often leading to jurisdictional overlaps, and worse, contradictions.

Finally, a fourth smaller but equally urgent issue is whether the Centre will extend the compensation formula for states to fill gaps in GST revenues, Ranade points out. The states were assured a generous formula, guaranteeing 14 per cent revenue growth so as to get them all to sign up for the new tax regime, but that assurance runs out in June 2022. 

“What next, especially with signs of a slowing economy? Of course, the original formula was too generous to begin with and states bore little risk. The revised formula should phase out compensation from 100 to zero in, say, three or four years. Co-operative federalism, thus, is still a work-in-progress. Dialogue and trust building are imperative,” Ranade adds.

The emerging view is that, while the states should have the right to dissent in the Council and their voice should not be drowned in the pursuit of unanimity in decision-making, the Centre can set an example by accommodating the demands of the states in the Council, even if it means some sacrifice on its part. After all, the onus is on it to run the Council harmoniously.

Also, if the GST has made the tax-payer’s life better, then the responsibility is on the Centre and the states to make it work. The Council should transcend political rivalries of the day.