India's grand federal tax experiment - the GST - is turning sour as states complain of high-handedness in the GST Council.
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"GST Council has turned authoritarian"
- The story: India launched its biggest indirect tax reform in July 2017, when states voluntarily gave up a large part of their taxation powers in return for a centrally-mandated GST regime, that promised "One Nation, One Tax". Things have not been as smooth as promised back then by the FM late Shri Arun Jaitley.
- Details: Some opposition-rules states now allege that the Goods and Services Tax Council (GSTC), driven by consensus earlier, has become authoritarian and majoritarian in approach. West Bengal's finance minister Amit Mitra said bureaucrats had taken over key committees which result in undermining the powers of the elected members of the Council. This clearly indicates the widening political rift within the federal tax body.
- Many now say that states gave up 70% of their taxation rights to embrace GST as consensus was the approach for decision making earlier.
- There was a "dramatic shift from consensus mechanism to authoritarian and majoritarian approach in the GST Council", "destroying the only federal institution in the country."
- Why the concern: Latest concerns are linked to the non-acceptance by the Council of demands for zero GST rate on key medical supplies needed for Covid management or subjecting them to a token 0.1% both of which would have enabled tax reduction to consumers as well as availability of tax credits to producers. The demand for full tax relief is also shared by some of the other opposition ruled states such as Kerala and Punjab. The Council, however, preferred to keep most of the items at 5% rate.
- It announced reduction of taxes on several medical supplies, including oxygen, ventilators and testing kits from 12% to 5%, ambulances from 28% to 12%, furnaces for crematoriums from 18% to 5% and two drugs from 5% to zero. Several states including West Bengal have been asking for full tax waiver on covid-related medical supplies.
- Mr Mitra pointed out that for FY21, states revenues have contracted by 3% and hence they should be compensated by a further Rs.63,000 crores. The earlier compensation calculations were based on much more optimistic assumptions.
- He pointed out that a panel of officials led by a central government official which was set up to take care of procedural matters — GST implementation committee or GIC - is now amending important rules which are only placed before the Council for reporting purposes, not for ratification. The GIC was formed of officers only for procedural issues but it decided on amending rules dealing with GST registration and suspension and the Council is only informed about it. This is grossly improper.
- Fitment Committee: The fitment committee of officials which recommends tax rate changes sends detailed proposals only close to the Council meeting which leaves ministers with little time to examine them. The schism between central government and opposition ruled states is widening at a time central and state authorities are faced with revenue shortage and higher spending requirements.
- Summary: It is clear that with every passing fiscal year, the centre and state rift is widening. This is an ominous signal for the health of a federal taxation system, and in light of the economic stress plaguing the economy, can have serious consequences.
- HISTORY OF GST COUNCIL
- In order to implement GST, Constitutional (122nd Amendment) Bill (CAB for short) was introduced in the Parliament and passed by Rajya Sabha on 03rd August, 2016 and Lok Sabha on 08th August, 2016. The CAB was passed by more than 15 states and thereafter Hon’ble President gave assent to “The Constitution (One Hundred And First Amendment) Act, 2016” on 8th of September, 2016. Since then the GST council and been notified bringing into existence the Constitutional body to decide issues relating to GST. On September 16, 2016, Government of India issued notifications bringing into effect all the sections of CAB setting firmly into motion the rolling out of GST. This notification sets out an outer limit of time of one year, that is till 15-9-2017 for bringing into effect GST.
- GST COUNCIL - As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A. The notification for bringing into force Article 279A with effect from 12th September, 2016 was issued on 10th September, 2016.
- As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members:
- Union Finance Minister - Chairperson b) The Union Minister of State, in-charge of Revenue of finance - Member c) The Minister In-charge of finance or taxation or any other Minister nominated by each State Government - Members
- As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws, principles that govern Place of Supply, threshold limits, GST rates including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc.
- The Union Cabinet under the Chairmanship of Prime Minister Shri Narendra Modi approved setting up of GST Council on 12th September, 2016 and also setting up its Secretariat.
- The Central Goods and Services Tax bill, Integrated Goods and Services Tax bill, Union Territories (without legislature) Goods and Services Tax bill and Goods and Services Tax (Compensation to States) bill have been passed by the Lok Sabha on 29.03.2017 and by the Rajya Sabha on 06.04.2017.
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