The Curious case of GST Council and the Indian Federalism

A federal State derives its existence from the Constitution, just as a corporation derives its existence from the grant by which it is created. Hence every power, executive, legislative or judicial, whether it belong to the nation or to the individual States, is subordinate to and controlled by the Constitution.[1]

In my previous article on GST [2], I have given an overview of what GST actually is and what are its probable effects on Indian tax regime. In this article I am going to concentrate on how GST will affect the very foundation of Indian Constitution, the federal tax structure. Federal structure in taxation means both the States and the Centre have the power to tax the goods & services that are in their jurisdiction. The GST as will be explained further is enshrined with some provisions that will affect the fiscal autonomy of the States. For understanding the GST effect on federal structure, we have to first understand the GST Council.

GST Council

With One Hundred and First Constitutional Amendment Act, 2016, Article 279(A) was inserted which talks about the GST Council. This council has to be instituted with 60 days after the amendment with the recommendation of the President.[3] The GST Council shall consist of the Union Finance Minister, who will be the Chairperson, and the Union Minister of State in charge of Revenue and Minister in charge of Finance or Taxation or any minister nominated by the State government would constitute the members and the States will choose among themselves one minister who would be the Vice-Chairperson.

Now the problem with GST council is that it is the ultimate authority that will recommend to the States and the Union of the tax to be imposed on the goods & services. It will recommend that States, Centre and even the local bodies about how much taxes, cesses and surcharges would be levied by them. And also it reserve the right to decide the date on which GST be levied on petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel. While previously up to some extent the States reserved the right to levy surcharges and taxes on petroleum and petroleum related products, but after this measure the States revenue from this sector would be completely wiped out. Also many States used to impose higher taxes on tobacco and tobacco related products, and that constitute a prominent part of their State revenue, but under GST act this subject has been kept under consideration and GST Council will decide later how much tax should be imposed.
As we already know GST is a destination based tax, so the manufacturing States will be allowed to charge additional levy in case of inter-state trade, which have been kept very limited in the present case. Also whatever taxes that are levied in case of inter-state trade will go directly in consolidating fund, no distribution of taxes will be there between the Centre and the States.

Every Decision made during the meeting should be supported by at least 75 percent majority of the weighted votes of the members who are present and voting at the meeting. In “Article 279A” a principle is there which divides the total weighted vote cast between Central Government and State Government :-

(i) The vote of Central Government shall have the weighted of one-third of the total votes

(ii) The votes of State Government shall have the weighted of two third of the total votes, cast in the meeting.

So, if the Centre anyhow manages to get the votes of 6-7 States it can change or introduce a new tax on whatever goods & services it wants to. And also the GST Council will establish a mechanism to adjudicate any dispute between the Govt. Of India and one or more States or between the Govt of India and any States on one side and one or more others States on the other side; or between two or more States.

Now you can understand the relevance of the quotation up above by A.V.Dicey. The GST Council will somehow effect the financial federal structure of India.
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[1] Law of the Constitution by A.V. Dicey p. 144.
[2]GST: India’s approach to One Nation, One Tax
[3] Art 279(A)(1), Indian Constitution.