The Bill That Will Doom GST

As it stands, the Constitutional Amendment Bill is a recipe for disaster

Trucks laden with iron ore sit in traffic on a bridge en-route to Paradip Port in Paradip, Odisha, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
Trucks laden with iron ore sit in traffic on a bridge en-route to Paradip Port in Paradip, Odisha, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Recipe For Disaster

  • Amendment Bill unclear on whether the GST Council’s “recommendations” are binding.
  • The Centre is given an effective veto over any decision of the GST Council.
  • The GST Council will itself decide how its decisions will be challenged, and who will hear that challenge.

The Constitution (122nd Amendment) Bill, 2014 seeking to create a constitutional framework for the Goods and Services Tax, as it stands, is a recipe for disaster, and if not corrected, will doom the GST in years to come.

To understand the constitutional framework that is being put in place for the GST, it is necessary to understand how India’s federalism works. The Union Government and the states have each been given exclusive powers to impose taxes on a wide variety of subjects in order to be able to run a government. While the Union has been given taxing power over more subjects than the states, this has been balanced in the Constitution by the need to share some of its revenue with the states in the manner determined by the Finance Commission. Therefore, as it stands, the Union taxes income, manufacture, imports, and services, and states tax sale of goods, excise on alcohol, entertainments, et al.

Nonetheless, in the subjects earmarked to them under the “State List”, states are completely free to frame their own laws, and levy taxes, subject only to the limits under the Constitution.

Under the Constitution therefore, there is no subject over which both the Union and the state can impose a tax. Even though the Constitution provides for many subjects over which the Union and the state may make laws (i.e., all the subjects mentioned in the Concurrent List), none of these subjects relate to a tax. The Constitution framers clearly did not want the Union and the state to be fighting over the same tax base or the Union controlling the state in matters of taxation.

The GST is a radical departure from this Constitutional vision. By allowing both the state and Union Governments to tax both goods and services, in the interests of creating an easier tax system, and creating a unified market, the proposed constitutional amendment presents a dramatic change in the Constitutional scheme of the federal government.

But does the GST address some of the concerns with having overlapping taxation powers that our Constitution framers aimed to avoid?

GST Council: Toothless?

The mechanism envisaged is the GST Council. Composed of the Union Finance Minister and Minister of State for Finance, and State Finance Ministers from all states, it is a body that performs the crucial coordination role necessary for the smooth operation of GST. It is empowered to make “recommendations” on rates, exemptions, turnover limit for paying the tax, and all the important aspects essential to the operation of GST.

It is, however, at present, designed for failure.

There are two major issues and one minor problem with the GST Council.

The minor problem is that the Amendment Bill itself has no clear idea of whether the GST Council’s “recommendations” are binding. On the one hand, it uses the words “recommendations” four times, but suddenly uses the word “decision” when talking about the voting manner. Likewise, the fact that there’s a dispute resolution mechanism suggests that recommendations are necessarily binding on the states and the Union, but the Bill insists on using the term “recommendation”. This is of course easily fixed by replacing the term “recommendation” with decision everywhere since all indications otherwise suggest that the GST Council intends to make binding decisions.

The major problems however, lie with the manner in which the GST Council makes its decisions and how disputes, arising out of them, are resolved.

Centre Always Wins

The initial drafts of the GST Amendment Bill had the GST Council taking its decisions on the basis of consensus. However, the present draft allows decisions to be taken on the basis of majority voting in the Council. What’s worse, the votes in the GST Council are weighted in such a manner that the Union is given an effective veto over any decision of the GST Council. This means that even if a given measure (say to exclude a certain category of goods from GST) is supported by more than half the states, or indeed, every single state, the Centre can still say no to it, and the decision will not go through.

One would have thought that in a federal polity like ours, where states are these days ruled by parties other than the one in power at the Centre, serious objections would have been raised to this proposed decision making structure of the GST Council, especially by regional parties ruling different states. Unfortunately, for reasons best known to them, all regional parties, except the AIADMK, have not raised a word about this serious flaw.

This is not just a turf battle between the Union and the states, but goes to the heart of a federal polity such as India. The GST Council, as it stands, allows the Union power to veto fiscal policies of all states, forcing them to tailor their laws on GST to meet the Union’s demands. An arguable case can be made out that the GST Amendment Bill affects the “basic structure” of the Constitution and is therefore, unconstitutional.

Institutionalising Mistrust

The second major issue is the absence of a clear dispute resolution framework outlined in the Constitution Amendment Bill. The GST Council itself is given the power to establish, at some later date, a dispute resolution mechanism where a state can challenge the decision of the GST Council. In other words, the very body which takes the decision, will also decide how its decisions will be challenged, and who will hear the challenge. Read with the veto power that the Union Government has in the GST Council, this means that there is absolutely no effective remedy in law for a state aggrieved by a decision of the GST Council.

The Constitutional frailties of the GST Council notwithstanding, the manner in which the GST Council will function suggests a body set up for failure. It is impossible for the Union to implement GST without the cooperation and understanding of the states, but in a system where the Union always has the final say, it will only breed mistrust between the Union and the states. Whether it is on the issue of rates or exemptions or any one of the crucial issues needed to make the GST a success, the Union and the states have to work together and arrive at a common understanding to make it function. Unfortunately, the GST Council, as it has been envisaged, only institutionalises mistrust between the Union and the states, pushing them to harden their stances on partisan lines.

It is a failure of imagination and leadership that we’ve been saddled with the present GST Amendment Bill – one that is likely to hamper the proper implementation and functioning of GST in years to come. Hopefully, judicial intervention or the dawning of wisdom will prompt the necessary changes.

Alok Prasanna Kumar is Senior Resident Fellow of the Vidhi Centre for Legal Policy, based in Delhi and has practised as an advocate in the Supreme Court of India.

The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.